Notes to the consolidated annual accounts

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1. Nature, activities and composition of the group

Distribuidora Internacional de Alimentación, S.A. (hereinafter "the Parent" or "DIA") was incorporated as a public limited liability company ("sociedad anónima") for an unlimited period under Spanish law on 24 June 1966, and its registered office is located in Las Rozas (Madrid).

The Parent's statutory activity comprises the following activities in Spain and abroad:

((a) The wholesale or retail purchase, sale and distribution of food products and any other consumer goods in both domestic and foreign markets; domestic healthcare, parapharmaceutical, homoeopathic, dietary and optical products, cosmetics, costume jewellery, household products, perfumes and personal hygiene products; and food, health and hygiene products and insecticides, and all other kinds of widely available consumer products for animals.

(b) Corporate transactions; the acquisition, sale and lease of movable property and real estate; and financial transactions as permitted by applicable legislation.

(c) Corporate services aimed at the sale of telecommunication products and services, particularly telephony services, through collaboration agreements with suppliers of telephony products and services. These co-operative services shall include the sale of telecommunication products and services, as permitted by applicable legislation.

(d) All manner of corporate collaboration services aimed at the sale of products and services of credit institutions, payment institutions, electronic money institutions and currency exchange establishments, in accordance with the provisions of the statutory activity and administrative authorisation of these entities. This collaboration shall include, as permitted by applicable legislation and, where appropriate, subject to any necessary prior administrative authorisation, the delivery, sale and distribution of products and services of these entities.

(e) Activities related to internet-based marketing and sales, and sales through any other electronic medium of all types of legally tradable products and services, especially food and household products, small electrical appliances, multimedia and IT products, photography equipment and telephony products, sound and image products and all types of services provided via the internet or any other electronic medium.

(g) Retail distribution of petrol, operation of service stations and retail sale of fuel to the public.

(h) The acquisition, ownership, use, management, administration and disposal of equity instruments of resident and non-resident companies in Spain through the concomitant management of human and material resources.

(i) The management, coordination, advisory and support of investees and companies with which the Parent works under franchise and similar contracts.

(j) The deposit and storage of goods and products of all types, both for the Company and for other companies.

Its principal activity is the retail sale of food products through owned or franchised self-service stores under the DIA brand name. The Parent opened its first establishment in Madrid in 1979.

The DIA Group currently trades under the names of DIA Market, DIA Maxi, Minipreço, La Plaza de DIA, City DIA, Clarel, Max Descuento, Cada DIA, and Mais Perto.

The Company is the parent of a group of subsidiaries (hereinafter the DIA Group or the Group) which are all fully consolidated, except for ICDC Services, Sàrl (50% owned by DIA World Trade, S.A.), Distribuidora Paraguaya de Alimentos, S.A. (10% owned by DIA Paraguay, S.A.), Red Libra Trading Services, S.L. (50% owned by DIA, S.A.) and CD Supply Innovation, S.L. (50% owned by DIA, S.A.), which are equity-accounted.

The following changes to the Group occurred in 2017 and 2016:

2017

During the last quarter of 2017, the DIA Group began a process to explore strategic alternatives in the business of its financial entity, Finandia, E.F.C., S.A., classifying the assets and liabilities of this company as held for sale at 31 December 2017, in accordance with IFRS 5 (see notes 13 and 24).

On 4 December 2017, the DIA Group expanded its collaboration with Casino through the creation of the company CD Supply Innovation, S.L. (hereinafter CDSI), with headquarters in Madrid and which commenced operations on 15 December. This company is 50% owned by DIA, S.A. and its scope is international, excluding Latin America. In order to optimise processes with suppliers and gain efficiency, enabling a better end offering to the consumer, the new company will largely be tasked with purchasing own brand products from its partners on its own behalf. It will also perform, inter alia, logistics management of supplies and quality control of these products, issuing penalties to suppliers where necessary.

On 12 June 2017, the company DIA Portugal II, S.A. was set up for the purposes of operating one store on a Lisbon market. Its share capital amounts to Euros 50,000, divided into 50,000 shares of Euro 1 par value each, fully subscribed by DIA Portugal, SA.

On 18 April 2017, the DIA Group and the EROSKI Group signed an agreement to set up Red Libra Trading Services, S.L., a new company tasked with negotiating with suppliers of distributor brands for both companies, as well as purchasing other materials and supplies necessary for their activity, in order to maximise the price-quality ratio for the consumer. This company will trade from Madrid and its capital is shared equally between the DIA and EROSKI Groups.

In the first quarter of 2017, the DIA Group began a process to explore strategic alternatives in its China business, classifying the assets and liabilities of its companies, DIA Tian Tian Management Consulting Service & Co. Ltd. and Shanghai DIA Retail Co. Ltd., as held for sale. In accordance with IFRS 5, the Company has discontinued the operations of its China business, re-stating the accounts for the prior year for comparability purposes (see note 13).

2016

On 2 December 2016, DIA Argentina increased its share capital by Argentine Pesos 197,928 thousand, which was fully subscribed by Group companies.

In May 2016 the Group acquired 100% of the capital of Hartford, S.A. and on 30 June 2016 this company changed its name to DIA Paraguay, S.A. (hereinafter DIA Paraguay). As a result of this acquisition, the Group now holds a 10% indirect interest in Distribuidora Paraguaya de Alimentos, S.A. (hereinafter DIPASA). The registered offices of DIA Paraguay and DIPASA are both located in Asunción, the capital of Paraguay. The principal activity of DIA Paraguay is to engage in legal trade operations of all kinds and, primarily, the purchase, sale, construction and lease of real estate, and the purchase, sale and exchange of vehicles on its own behalf, on behalf of third parties, or in association with third parties, in both the domestic and foreign markets. The principal activity of DIPASA is to undertake the operations included in the master franchise contract entered into with DIA Paraguay. Both companies commenced their respective activities at the end of 2016.

On 3 May 2016 and 26 December 2016, DIA Brazil increased its share capital by Brazilian Reals 100,000 thousand and Brazilian Reals 39,439 thousand, respectively. Both increases were fully subscribed by the Parent of the Group.

On 29 March 2016 the winding up of Beijing DIA Commercial Co. Ltd. was completed. The decision to wind up this company was taken in 2014 and its net assets were liquidated at 31 December 2015.

Details of the DIA Group's subsidiaries, as well as their activities, registered offices and percentages of ownership at 31 December 2017 and 2016 are as follows:

NAME

LOCATION

ACTIVITY

% interest

2016

2017

DIA Portugal Supermercados, Lda.

Lisbon

Wholesale and retail distribution of food products.

100.00

100.00

DIA Portugal II

Lisbon

Wholesale and retail distribution of food products.

-

100.00

DIA Argentina, S.A.

Buenos Aires

Wholesale and retail distribution of food products.

100.00

100.00

Distribuidora Internacional, S.A.

Buenos Aires

Services consultancy.

100.00

100.00

DIA Paraguay, S.A.

Asunción

To dedicate on his own, from third parties or associated with terd parties, both in the country or abroad, to any act of lawful commerce and mainly to the sale, construction and lease of real estate: and the purchase, sale and exchange of vehicles.

The basis of consolidation applicable to the subsidiaries, associates and joint ventures are set forth in note 2.7.

At 31 December 2017 and 2016, the Group has several master franchise agreements, some of which grant the Group the option, within a specific period, to purchase a percentage of the capital of the franchised business. The Group assesses, based on the terms of the agreement, whether these options are derivative financial instruments to be recognised in the consolidated financial statements. If the option entails the Group's control over the franchisee, the Group assesses the impact of the application of IFRS 3 Business combinations. At 31 December 2017 and 2016, the Group considers that the impact of these agreements on these consolidated financial statements is not significant.

2. Basis of presentation

2.1. Basis of preparation of the consolidated annual accounts

The directors of the Parent have prepared these consolidated annual accounts on the basis of the accounting records of Distribuidora Internacional de Alimentación S.A. and consolidated companies and in accordance with International Financial Reporting Standards as adopted by the European Union (IFRS-EU), and other applicable provisions in the financial reporting framework pursuant to Regulation (EC) No. 1606/2002 of the European Parliament and of the Council, to give a true and fair view of the consolidated equity and consolidated financial position of Distribuidora Internacional de Alimentación S.A. and subsidiaries at 31 December 2017 and of consolidated results of operations, consolidated cash flows and changes in consolidated equity for the year then ended.

On 28 February 2011 the DIA Group authorised for issue the consolidated financial statements for 2010, 2009 and 2008, which were the first consolidated financial statements drawn up, and they were filed with the Mercantile Registry of Madrid in accordance with current legislation.

The DIA Group chose the following exemptions from IFRS 1:

Business combinations: the DIA Group did not re-estimate the business combinations carried out prior to 1 January 2004 (see note 3 (a)).

Cumulative translation differences: the DIA Group recognised the cumulative translation differences of all foreign businesses prior to 1 January 2004 at zero, and transferred the related balances to reserves at that date (see note 3 (c)).

Financial instruments: the DIA Group opted to apply IAS 32 and IAS 39 from 1 January 2004.

These consolidated annual accounts were prepared on a historical cost basis, except for derivative financial instruments and financial instruments at fair value through profit or loss, which were measured at fair value (see note 15.5).

Note 3 includes a summary of all mandatory and significant accounting principles, measurement criteria and alternative options permitted under IFRS.

The Group has opted to present a consolidated income statement separately from the consolidated statement of comprehensive income. The consolidated income statement is reported using the nature of expense method and the consolidated statement of cash flows has been prepared using the indirect method.

The DIA Group's consolidated annual accounts for 2017 were authorised for issue by the board of directors of the Parent on 21 February 2018 and are expected to be approved by the shareholders of the Parent at their ordinary general meeting without any changes.

2.2. Comparative information

The consolidated statement of financial position, consolidated income statement, consolidated statement of changes in equity, consolidated statement of cash flows and the notes thereto for 2017 include comparative figures for 2016, which formed part of the consolidated annual accounts approved by the shareholders of the Parent at the ordinary general meeting held on 28 April 2017.

For the purposes of comparability of the consolidated income statement for 2016, it has been restated to classify the different income statement items corresponding to the China business in the consolidated income statement as net gains/losses on discontinued operations (see notes 1 and 13) and to classify the cash flows of this business in the statement of cash flows.

In 2017, the Group presented the items that meet the offsetting criteria at their net amount, restating the 2016 figures for comparative purposes as a result. In particular deferred tax assets and liabilities and supplier amounts, which are settled at their net amount.

2.3. Functional and presentation currency

The figures contained in the documents comprising these consolidated annual accounts are expressed in thousands of Euros, unless stated otherwise. The Parent’s functional and presentation currency is the Euro.

Relevant accounting estimates and judgements and other estimates and assumptions have to be made when applying the Group's accounting principles to prepare the consolidated annual accounts in conformity with IFRS-EU. A summary of the items requiring a greater degree of judgement or which are more complex, or where the assumptions and estimates made are significant to the preparation of the consolidated annual accounts, is as follows:

a) Relevant accounting estimates and assumptions

a.1) Evaluation of the potential impairment of non-financial assets subject to amortisation or depreciation: see note 3j (ii), note 5 and note 6.2.

a.2) Evaluation of the potential goodwill impairment: see note 3j(i) and note 6.1.

2.5. First-time application of accounting standards

The Group has applied all standards effective as of 01 January 2017. The application of these standards has not required any significant changes in the preparation of this year's consolidated annual accounts.

2.6. Standards and interpretations issued but not applied

At the publication date of these consolidated annual accounts, the following standards issued, but that haven't become effective and which the Group plans to apply on or after 1 January 2018, are:

IFRS 9 Financial Instruments:

IFRS 9 is effective for annual periods beginning on or after 1 January 2018, with early adoption permitted. The Group will apply this standard for the first time on 1 January 2018.

Given the nature of the Group’s financial assets and liabilities, the change in reporting criteria set forth in IFRS 9 is not significant for the Group. With regard to the new financial asset impairment calculation model based on the model of expected loan losses over the life of the asset, the Group has estimated the impact and it is not significant.

With regard to recognising refinanced financial liabilities issued on the stock market, the IASB has confirmed retrospective application as stated in IFRS 9 and this applies to the refinancing of bonds by the Parent during 2017 (see note 15.1). The Group has identified a minor impact which it will recognise in equity reserves at 1 January 2018, as established by the regulation.

With regard to hedge accounting, the Group uses forward foreign exchange contracts to hedge against fluctuations in fair value foreign exchanges as a result of changes in exchange rates and interest and will continue to apply IAS 39, therefore not expecting any impact on the consolidated financial statements.

For the sale of products, revenue is currently recognised when the goods are delivered to the customers at the stores, which is taken to be the point in time at which the customer accepts the goods and the related risks and rewards of ownership transfer. Revenue is recognised at this point provided that the revenue and costs can be measured reliably, the recovery of the consideration is probable (already received in cash transactions) and there is no continuing management involvement with the goods.

Under IFRS 15, revenue will be recognised when a customer obtains control of the goods which also takes place when the goods are delivered to the customers at the stores.

Although the customer is allowed to return any item, the impact of this is irrelevant in the Group. Therefore, there is no current impact in the recognition of revenue and will not either under IFRS 15.

The Group has carried out an analysis of its customer loyalty programmes and since discounts are generally granted and applied to customers when the transaction takes place, they are recognised as a reduction in income. Therefore, no significant impacts are expected.

IFRS 15 is effective for annual periods beginning on or after 1 January 2018, with early adoption permitted. The Group will apply this standard for the first time on 1 January 2018.

The actual impact of adopting IFRS 15 on the Group's consolidated financial statements in 2018 will be very limited.

IFRS 16 Leases:

IFRS 16 introduces a single, on-balance lease sheet accounting model for lessees. A lessee recognises a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. There are optional exemptions for short-term leases and leases of low value items. Lessor accounting remains similar to the current standard - i.e. lessors continue to classify leases as finance or operating leases.

The standard is effective for annual periods beginning on or after 1 January 2019 although early adoption is permitted for entities that apply IFRS 15 Revenue from Contracts with Customers at or before the date of initial application of IFRS 16.

The Group has started an initial assessment of the potential impact on its consolidated financial statements. So far, the most significant impact identified is that the Group will recognize new assets and liabilities for its operating leases of warehouse and stores. In addition, the nature of expenses related to those leases will now change as IFRS 16 replaces the straight-line operating lease expense with a depreciation charge for right-of-use assets and interest expense on lease liabilities.

As a lessee, the Group can either apply the standard using a retrospective approach; or a modified retrospective approach with optional practical expedients.

The lessee applies the election consistently to all of its leases. The Group plans to apply IFRS 16 initially on 1 January 2019. The Group has not yet determined which transition approach to apply.

As a lessor, the Group is not required to make any adjustments for leases in which it is a lessor except where it is an intermediate lessor in a sub-lease.

The Group has not yet completed the quantification of the impact on its reported assets and liabilities of adoption of IFRS 16. The quantitative effect will depend on, inter alia, the transition method chosen, the extent to which the Group uses the practical expedients and recognition exemptions, and any additional leases that the Group enters into. The Group considers especially relevant in the application of this standard and its quantification the analysis to be performed on the term of the lease, as well as the discount rate to apply. The Group expects to disclose its transition approach and quantitative information before adoption and, in any case, expects that the impact of the application of this standard will be significant in the group financial statements.

IFRIC 23 Uncertainty over Income Tax Treatments:

IFRIC 23 is effective for annual periods beginning on or after 1 January 2019, with early adoption permitted. The Group will apply the standard for the first time on 1 January 2019 and it is analysing the potential impact of this standard on the Group's consolidated financial statements for 2019. It believes that the impact will be very limited.

2.7. Basis of consolidation

a) Subsidiaries

IFRS 10 requires an entity (the parent) that controls one or more other entities (subsidiaries) to present consolidated financial statements and establishes control as the basis for consolidation. An investor, regardless of the nature of its involvement with an entity (the investee), shall determine whether it is a parent by assessing whether it controls the investee. An investor controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Thus, an investor controls an investee if and only if the investor has all the following:

a) power over the investee;

b) exposure, or rights, to variable returns from its involvement with the investee; and

c) the ability to use its power over the investee to affect the amount of the investor's returns.

d) The annual accounts or financial statements of the subsidiaries used in the consolidation process have been prepared as of the same date and for the same period as those of the Parent.

Subsidiaries are entities over which the Parent exercises control, either directly or indirectly, through subsidiaries. The Parent controls a subsidiary when it is exposed, or has rights, to variable returns from its involvement with the subsidiary and has the ability to affect those returns through its power over the subsidiary. The Parent has power over a subsidiary when it has existing substantive rights that give it the ability to direct the relevant activities. The Parent is exposed, or has rights, to variable returns from its involvement with the subsidiary when its returns from its involvement have the potential to vary as a result of the subsidiary's performance.

The income, expenses and cash flows of subsidiaries are included in the consolidated annual accounts from their acquisition date, which is the date control commences. Subsidiaries are excluded from the consolidated Group from the date on which this control is lost. For consolidation purposes the annual accounts of subsidiaries are prepared for the same reporting period as those of the Parent, and applying the same accounting policies. All balances, income and expenses, gains, losses and dividends arising from transactions between Group companies are eliminated in full.

b) Associates

Associates are entities over which the Parent, either directly or indirectly through subsidiaries, exercises significant influence. Significant influence is the power to participate in the financial and operating policy decisions of an entity, but is not control or joint control over those policies. The existence of potential voting rights that are exercisable or convertible at the end of each reporting period, including potential voting rights held by the Group or other entities, are considered when assessing the existence of significant influence.

Investments in associates are accounted for using the equity method from the date that significant influence commences until the date that significant influence ceases.

c) Joint agreements

Joint agreements are considered to be those in which there exists a contractual agreement to share control of an economic activity, such that decisions regarding significant activities require the unanimous consent of the Group and the rest of the participants or operators. The existence of joint control is evaluated considering the subsidiaries’ definition of control.

Joint agreements can be classified as joint ventures or joint operations. Investments in the Group's joint ventures are recorded using the equity method.

3. Significant accounting policies

a) Business combinations and goodwill

As permitted by IFRS 1, the Group has recognised only business combinations that occurred on or after 1 January 2004, the date of transition of the Carrefour Group to IFRS-EU, using the acquisition method (see note 2.1). Entities acquired prior to that date were recognised in accordance with the generally accepted accounting principles applied by the Carrefour Group at that time, taking into account the necessary corrections and adjustments at the transition date.

The Group applies IFRS 3 Business Combinations, revised in 2014, to all such transactions detailed in these consolidated annual accounts.

The Group applies the acquisition method for business combinations. The acquisition date is the date on which the Group obtains control of the acquiree.

The consideration transferred in a business combination is calculated as the sum of the acquisition-date fair values of the assets transferred, the liabilities incurred or assumed, the equity instruments issued and any consideration contingent on future events or compliance with certain conditions in exchange for control of the acquiree.

The consideration transferred excludes any payment that does not form part of the exchange for the acquired business. Acquisition costs are recognised as an expense when incurred.

At the acquisition date the Group recognises the assets acquired, the liabilities assumed and any non-controlling interest at fair value. Non-controlling interests in the acquiree are recognised at the proportional part of the fair value of the net assets acquired. These criteria are only applicable for non-controlling interests which grant entry into economic benefits and entitlement to the proportional part of net assets of the acquiree in the event of liquidation. Otherwise, non-controlling interests are measured at fair value or value based on market conditions.

The excess between the consideration given and the value of net assets acquired and liabilities assumed, is recognised as goodwill. Any shortfall, after evaluating the consideration given and the identification and measurement of net assets acquired, is recognised in profit and loss.

Note 3j) details the criteria relating to goodwill impairment.

Moreover, for business combinations without consideration, the excess of the value assigned to non-controlling interests, plus the fair value of the previously held interest in the acquiree, over the net value of the assets acquired and liabilities assumed is recognised as goodwill. Any shortfall is recognised in profit or loss, after assessing the amount of non-controlling interests, the previous interest and the identification and measurement of net assets acquired. If the Group has no previously held interest in the acquiree, the amount allocated to net assets acquired is attributed in full to non-controlling interests and no goodwill or negative goodwill is recognised.

b) Non-controlling interests

Because they were acquired prior to 1 January 2004, non-controlling interests in subsidiaries were recognised at the amount of the Group's share of the subsidiary's equity.

Profit and loss and each component of other comprehensive income are allocated to equity attributable to shareholders of the Parent and to non-controlling interests in proportion to their investment, even if this results in the non-controlling interests having a deficit balance. Agreements entered into between the Group and non-controlling interests are recognised as a separate transaction.

Changes in the Group's percentage ownership of a subsidiary that imply no loss of control are accounted for as equity transactions. When control over a subsidiary is lost, the Group adjusts any residual investment in the entity to fair value at the date on which control is lost.

Group investments and, where applicable, non-controlling interests in subsidiaries or associates are calculated taking into account the possible exercise of potential voting rights and other derivative financial instruments which, in substance, currently allow access to the economic benefits associated with the interests held, such as entitlement to a share in future dividends and changes in the value of subsidiaries and associates.

c) Translation of foreign operations

The Group has applied the exemption permitted by IFRS 1, First-time Adoption of International Financial Reporting Standards, relating to accumulated translation differences. Consequently, translation differences recognised in the consolidated annual accounts generated prior to 1 January 2004 are recognised in retained earnings (see note 2.1). As of that date, foreign operations whose functional currency is not the currency of a hyperinflationary economy have been translated into Euros as follows:

Assets and liabilities, including goodwill and net asset adjustments derived from the acquisition of the operations, including comparative amounts, are translated at the closing rate at the reporting date.

Capital and reserves are translated using historical exchange rates.

Income and expenses, including comparative amounts, are translated at the exchange rates prevailing at each transaction date.

All resulting exchange differences are recognised as translation differences in other comprehensive income.

For presentation of the consolidated statement of cash flows, cash flows of foreign subsidiaries and joint ventures, including comparative balances, are translated into Euros applying the exchange rates prevailing at the transaction date.

Translation differences recognised in other comprehensive income are accounted for in profit or loss as an adjustment to the gain or loss on the sale using the same criteria as for subsidiaries, associates and joint ventures.

d) Foreign currency transactions, balances and cash flows

Transactions in foreign currency are translated into the functional currency at the spot exchange rate prevailing at the date of the transaction.

Monetary assets and liabilities denominated in foreign currencies have been translated into Euros at the closing rate, while non-monetary assets and liabilities measured at historical cost have been translated at the exchange rate prevailing at the transaction date. Non-monetary assets measured at fair value have been translated into Euros at the exchange rate at the date that the fair value was determined.

In the consolidated statement of cash flows, cash flows from foreign currency transactions have been translated into Euros at the exchange rates prevailing at the dates the cash flows occurred. The effect of exchange rate fluctuations on cash and cash equivalents denominated in foreign currencies is recognised separately in the statement of cash flows as net exchange differences.

Exchange gains and losses arising on the settlement of foreign currency transactions and the translation into Euros of monetary assets and liabilities denominated in foreign currencies are recognised in profit or loss. However, exchange gains or losses arising on monetary items forming part of the net investment in foreign operations are recognised as translation differences in other comprehensive income.

Exchange gains or losses on monetary financial assets or financial liabilities denominated in foreign currencies are also recognised in profit or loss.

e) Recognition of income and expenses

Income and expenses are recognised in the consolidated income statement on an accruals basis when the actual flow of goods and services they represent takes place, regardless of when the monetary or financial flows derived therefrom arise.

Revenue from the sale of goods or services is measured at the fair value of the consideration received or receivable. Volume rebates, prompt payment and any other discounts, as well as the interest added to the nominal amount of the consideration, are recognised as a reduction in the consideration.

Discounts granted to customers are recognised as a reduction in sales revenue when it is probable that the discount conditions will be met.

The Group has customer loyalty programmes which do not entail credits, as they comprise discounts which are applied when a sale is made and are recognised as a reduction in the corresponding transaction.

The Group recognises revenue from the sale of goods when:

It has transferred to the buyer the significant risks and rewards of ownership of the goods;

It retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold;

The amount of revenue and the costs incurred or to be incurred can be measured reliably;

It is probable that the economic benefits associated with the transaction will flow to the Group; and

The costs incurred or to be incurred in respect of the transaction can be measured reliably.

f) Intangible assets

Intangible assets, except for goodwill (see note 3 (a)), are measured at acquisition cost or cost of production, less any accumulated amortisation and accumulated impairment.

The Group assesses whether the useful life of each intangible asset is finite or indefinite. Intangible assets with finite useful lives are amortised systematically over their estimated useful lives and their recoverability is analysed when events or changes occur that indicate that the carrying amount might not be recoverable. Intangible assets with indefinite useful lives, including goodwill are not amortised, but are subject to analysis to determine their recoverability on an annual basis, or more frequently if indications exist that their carrying amount may not be fully recoverable. Management reassesses the indefinite useful life of these assets on a yearly basis.

The amortisation methods and periods applied are reviewed at year end and, where applicable, adjusted prospectively.

Internally generated intangible assets

Development expenses, which mainly relate to computer software and industrial property, are capitalised to the extent that:

The Group has technical studies that demonstrate the feasibility of the production process.

The Group has undertaken a commitment to complete production of the asset, to make it available for sale or internal use.

The asset will generate sufficient future economic benefits.

The Group has sufficient technical and financial resources to complete development of the asset and has devised budget control and cost accounting systems that enable monitoring of budgetary costs, modifications and the expenditure actually attributable to the different projects.

Expenditure on activities for which costs attributable to the research phase are not clearly distinguishable from costs associated with the development stage of intangible assets are recognised in profit and loss.

Expenditure on activities that contribute to increasing the value of the different businesses in which the Group as a whole operates is recognised as expenses when incurred. Replacements or subsequent costs incurred on intangible assets are generally recognised as an expense, except where they increase the future economic benefits expected to be generated by the assets.

Computer software

Computer software comprises all the programs relating to terminals at points of sale, warehouses and offices, as well as micro-software. Computer software is recognised at cost of acquisition and/or production and is amortised on a straight-line basis over its estimated useful life, which is usually three years. Computer software maintenance costs are charged as expenses when incurred.

Leaseholds

Leaseholds are rights to lease business premises which have been acquired through an onerous contract assumed by the Group. Leaseholds are measured at cost of acquisition and amortised on a straight-line basis over the shorter of ten years and the estimated term of the lease contract.

Industrial property

ndustrial property essentially comprises the investment in the development of commercial models and product ranges, amortised over four years.

g) Property, plant and equipment

Property, plant and equipment are measured at acquisition cost or cost of production, less any accumulated depreciation and accumulated impairment. Land is not depreciated.

The cost of acquisition includes external costs plus internal costs for materials consumed, which are recognised as income in the income statement. The cost of acquisition includes, where applicable, the initial estimate of the costs required to dismantle or remove the asset and to restore the site on which it is located, when the Group has the obligation to carry out these measures as a result of the use of the asset.

Given that the average period to carry out work on warehouses and stores does not exceed 12 months, there are no significant interest and other finance charges that are considered as an increase in property, plant and equipment.

Non-current investments made in buildings leased by the Group under operating lease contracts are recognised following the same criteria as those used for other property, plant and equipment. These investments are depreciated over the shorter of their useful life and the lease term, taking renewals into account.

Enlargement, modernisation or improvement expenses that lead to an increase in productivity, capacity or efficiency or lengthen the useful life of the assets are capitalised as an increase in the cost of the assets when recognition criteria are met.

Repair and maintenance costs are recognised in the consolidated income statement in the year in which they are incurred.

The Group companies depreciate their property, plant and equipment from the date on which these assets enter into service. Property, plant and equipment are depreciated by allocating the cost of the assets over the following estimated useful lives, which are calculated in accordance with technical studies, which are reviewed on a regular basis:

Buildings

40

Installations in leased stores

10-20

Technical installations and machinery

3-7

Other installations, equipment and furniture

4-10

Other property, plant and equipment

3-5

Estimated residual values and depreciation methods and periods are reviewed at each year end and, where applicable, adjusted prospectively.

h) Leases

Lessee accounting

Determining whether a contract is, or contains, a lease is based on an analysis of the substance of the arrangement and requires an assessment of whether fulfilment of the arrangement is dependent on the use of a specific asset and whether the arrangement conveys a right to use the asset to the DIA Group.

Leases under which the lessor maintains a significant part of the risks and rewards of ownership are classified as operating leases. Operating lease payments are expensed on a straight-line basis over the lease term.

Leases are classified as finance leases when substantially all the risks and rewards incidental to ownership of the assets are transferred to the Group. At the commencement of the lease term, the Group recognises the assets, classified in accordance with their nature, and the associated debt, at the lower of fair value of the leased asset and the present value of the minimum lease payments agreed. Lease payments are allocated proportionally between the reduction of the principal of the lease debt and the finance charge, so that a constant rate of interest is obtained on the outstanding balance of the liability. Finance charges are recognised in the consolidated income statement over the life of the contract.

Contingent rents are recognised as an expense when it is probable that they will be incurred.

Lessor accounting

The Group has granted the right to use certain spaces within the DIA stores to concessionaires and the right to use leased establishments to franchisees under contracts. The risks and rewards incidental to ownership are not substantially transferred to third parties under these contracts. Operating lease income is taken to the consolidated income statement on a straight-line basis over the lease term. Assets leased to concessionaires are recognised under property, plant and equipment following the same criteria as for other assets of the same nature.

Sale and leaseback transactions

In each sale and leaseback transaction, the Group assesses the classification of finance and operating lease contracts for land and buildings separately for each item, and assumes that land has an indefinite economic life. To determine whether the risks and rewards incidental to ownership of the land and buildings are substantially transferred, the Group considers the present value of minimum future lease payments and the minimum lease period compared with the economic life of the building.

If the Group cannot reliably allocate the lease rights between the two items, the contract is recognised as a finance lease, unless there is evidence that it is an operating lease.

Transactions that meet the conditions for classification as a finance lease are considered as financing operations and, therefore, the type of asset is not changed and no profit or loss is recognised.

When the leaseback is classed as an operating lease:

If the transaction is established at fair value, any profit or loss on the sale is recognised immediately in consolidated profit or loss for the year.

If the sale price is below fair value, any profit or loss is recognised immediately. However, if the loss is compensated for by future lease payments at below market price, it is deferred in proportion to the lease payments over the period for which the asset is to be used.

If the sale price is above fair value, the excess over fair value is deferred and amortised over the period for which the asset is to be used.

i) Non-current assets held for sale and Discontinued operations

Non-current assets or disposal groups whose carrying amount will be largely recovered through a sale transaction shall be classified as held for sale, instead of recognised at the value in use. In order to classify non-current assets or disposal groups as held for sale, they must be available for disposal in their current condition, exclusively subject to the usual terms and conditions of sale transactions, and the transaction must also be deemed to be highly probable.

Non-current assets and disposal groups classified as held for sale are not amortised or depreciated, and are recorded at their carrying amount or fair value, whichever is lower, less costs of retirement or disposal.

A discontinued operation is a component of the Group that either has been disposed of, or is classified as held-for-sale, and:

represents a separate major line of business or geographical area of operations;

is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations; or

is a subsidiary acquired exclusively with a view to resale.

A component of the Group comprises operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the Group.

The Group discloses the post-tax profit and loss of discontinued operations and the post-tax gain or loss recognised on the measurement at fair value less costs to sell or distribute or on the disposal of the assets or disposal group(s) constituting the discontinued operation in profit or loss net of taxes of discontinued operations in the consolidated income statement.

If the Group ceases to classify a component as a discontinued operation, the results previously disclosed as discontinued operations are reclassified to continuing operations for all years presented.

j) Impairment of non-financial assets subject to amortisation or depreciation.

(i) Impairment of Goodwill

Pursuant to the criteria contained in IAS 36, the Group performs a test annually to assess potential impairment on each CGU or group of CGUs with associated goodwill, to determine whether the carrying amount of these assets exceeds their recoverable amount.

The recoverable amount of each CGU or group of CGUs is the higher of their fair value less costs to sell and their value in use. Determining this recoverable value and the grouping of cash-generating units to which goodwill has been allocated requires judgement on the part of the management and the use of estimates.

The CGU or group of CGUs to which goodwill has been allocated should represent the lowest level at which goodwill is monitored for internal management purposes and should not be larger than an operating segment before aggregation determined in accordance with IFRS 8. The DIA Group assesses the allocation of goodwill at company level. This choice is based on both organisational and strategic criteria and how implementation decisions are made.

A CGU's value in use is measured based on the future cash flows the Group expects to derive from each company, expectations about possible variations in the amount or timing of those future cash flows, the time value of money, the price for bearing the uncertainty inherent in the assets and other factors that market participants would reflect in pricing the future cash flows associated with the assets. Note 6.1 contains some of the main assumptions used to measure the value in use of the CGUs to which goodwill is allocated.

(ii) Impairment of non-financial assets subject to amortisation

Pursuant to IAS 36, the Group evaluates whether there are indications of possible impairment losses on non-financial assets subject to amortisation at the end of each reporting period to verify whether the carrying amount of these assets exceeds the recoverable amount.

Recoverable amount is determined for each individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. If this is the case, recoverable amount is determined for the cash-generating unit (CGU) to which the asset belongs. For the purposes of assessing impairment, each store relates to a separate cash-generating unit.

Based on past experience, the Group considers that there are indications of impairment when the adjusted EBITDA (taken to mean earnings before depreciation/amortisation and impairment, gains/losses on disposal of assets and other non-recurring income and expense) of a mature store (one that has been in operation for more than two years) has been negative for more than two years and also those stores where impairment has been recorded. When indications of impairment exist, the Group estimates the recoverable amount of the assets allocated to each cash-generating unit, calculated as the higher of fair value less costs to sell and value in use. Value in use is determined by discounting estimated future cash flows, applying a pre-tax discount rate which reflects the value of money over time, and considering the specific risks associated with the asset.

Determining this recoverable value and evaluating whether there exist signs of impairment of the cash-generating units requires judgement on the part of the management and the use of estimates.

In order to estimate the value in use, the Group uses the strategic plans of the different cash-generating units to which the assets are assigned. These strategic plans generally cover a five-year period. For longer periods, projections based on strategic plans are used as of the fifth year, applying a constant expected growth rate. Note 6.1 includes some of the main assumptions considered in determining the value in use of the cash-generating units to which the non-current assets are allocated.

The discount rates used are calculated before tax and are adjusted for the corresponding country and business risks.

When the carrying amount of an asset exceeds its estimated recoverable amount, the asset is considered to be impaired. In this case the carrying amount is adjusted to the recoverable amount and the impairment loss is recognised in the consolidated income statement. Amortisation and depreciation charges for future periods are adjusted to the new carrying amount during the remaining useful life of the asset. Assets are tested for impairment on an individual basis, except in the case of assets that generate cash flows that are not independent of those from other assets (cash-generating units).

When new events or changes in existing circumstances arise which indicate that an impairment loss recognised in a previous period could have disappeared or been reduced, a new estimate of the recoverable amount of the asset or cash-generating unit is made. Previously recognised impairment losses are only reversed if the assumptions used in calculating the recoverable amount have changed since the most recent impairment loss was recognised. In this case, the carrying amount of the asset or cash-generating unit is increased to its new recoverable amount, to the limit of the carrying amount this asset or cash-generating unit would have had had the impairment loss not been recognised in previous periods. The reversal is recognised in the consolidated income statement and amortisation and depreciation charges for future periods are adjusted to the new carrying amount.

k) Advertising and catalogue expenses

The cost of acquiring advertising material or promotional articles and advertising production costs are recognised as expenses when incurred. However, advertising placement costs that can be identified separately from advertising production costs are accrued and expensed as the advertising is published.

i) Financial instruments - assets

Regular way purchases and sales of financial assets are recognised in the consolidated statement of financial position at the trade date, when the Group undertakes the commitment to purchase or sell the asset. At the date of first recognition, the DIA Group classifies its financial instruments into the following four categories: financial assets at fair value through profit and loss, loans and receivables, held-to-maturity investments and available-for-sale financial assets. The only significant financial assets are classified under loans and receivables.

Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market and are not classified in any other financial asset categories. Assets of this nature are recognised initially at fair value, including transaction costs incurred, and subsequently measured at amortised cost using the effective interest method. Results are recognised in the consolidated income statement at the date of settlement or impairment loss, and through amortisation. Trade receivables are initially recognised at fair value and subsequently adjusted where objective evidence exists that the debtor may default on payment. The provision for bad debts is calculated based on the difference between the carrying amount and the recoverable amount of receivables. Current trade balances are not discounted.

Guarantees paid in relation to rental contracts are measured using the same criteria as for financial assets. The difference between the amount paid and the fair value is classified as a prepayment and recognised in consolidated profit and loss over the lease term.

All or part of a financial asset is derecognised when one of the following circumstances arises:

The rights to receive the cash flows associated with the asset have expired.

The Group has assumed a contractual obligation to pay the cash flows received from the asset to a third party.

The contractual rights to the cash flows from the asset have been transferred to a third party and all of the risks and rewards of ownership have been transferred.

In particular, the DIA Group derecognises trade balances held with its suppliers in respect of trade discounts granted by the latter when they are transferred in factoring operations in which the Group retains no credit or interest rate risk. Conversely, the Group does not derecognise these trade balances when it retains substantially all the risks and rewards incidental to ownership thereof, but instead recognises a financial liability for the same amount as the consideration received.

m) Inventories

Inventories are initially measured at cost of purchase based on the weighted average cost method.

The purchase price comprises the amount invoiced by the seller, after deduction of any discounts, rebates, non-trading income or other similar items, plus any additional costs incurred to bring the goods to a saleable condition, other costs directly attributable to the acquisition and indirect taxes not recoverable from the Spanish taxation authorities.

Trade discounts are recognised as a reduction in the cost of inventories when it is probable that the conditions for discounts to be received will be met. Any unallocated discounts are used to reduce the balance of merchandise and other consumables used in the consolidated income statement.

Purchase returns are recognised as a reduction in the carrying amount of inventories returned, except where it is not feasible to identify these items, in which case they are accounted for as a reduction in inventories on a weighted average cost basis.

The previously recognised write-down is reversed against profit and loss when the circumstances that previously caused inventories to be written down no longer exist or when there is clear evidence of an increase in net realisable value because of changed economic circumstances. The reversal of the valuation adjustment is limited to the lower of the cost and the revised net realisable value of the inventories.

Write-downs to net realisable value recognised or reversed on inventories are classified under merchandise and other consumables used.

n) Cash and cash equivalents

Cash and cash equivalents recognised in the consolidated statement of financial position include cash in hand and in bank accounts, demand deposits and other highly liquid investments maturing in less than three months. These items are recognised at historical cost, which does not differ significantly from their realisable value.

For the purpose of the consolidated statement of cash flows, cash and cash equivalents reflect the items defined in the paragraph above. Any bank overdrafts are recognised in the consolidated statement of financial position as financial liabilities from loans and borrowings.

o) Financial liabilities

Financial liabilities are initially recognised at the fair value of the consideration given, less any directly attributable transaction costs. In subsequent periods, these financial liabilities are carried at amortised cost using the effective interest method. Financial liabilities are classified as non-current when their maturity exceeds 12 months or the DIA Group has an unconditional right to defer settlement of the liability for at least 12 months after the reporting period.

Financial liabilities are derecognised when the corresponding obligation is settled, cancelled or has expired. When a financial liability is substituted by another with substantially different terms, the Group derecognises the original liability and recognises a new liability, taking the difference in the respective carrying amounts to the consolidated income statement.

The Group considers the terms to be substantially different if the discounted present value of the cash flows under the new terms, including any fees paid net of any fees received and discounted using the original effective interest rate, is at least 10 per cent different from the discounted present value of the remaining cash flows of the original financial liability.

The Group has contracted reverse factoring facilities with various financial institutions to manage payments to suppliers. Trade payables settled under the management of financial institutions are recognised under trade and other payables in the consolidated statement of financial position until they have been settled, repaid or have expired.

The amounts paid by the financial institutions as consideration for the acquisition of invoices or payment documents for the trade payables recorded by the Group are recognised under other income in the consolidated income statement when the invoices or documents are conveyed.

Guarantees received in sublease contracts are measured at nominal amount, since the effect of discounting is immaterial

Derivative financial products and hedge accounting

Derivative financial instruments are initially recognised using the same criteria as those described for financial assets and financial liabilities. Financial derivatives that do not meet the hedge accounting criteria shown below are classified as financial assets and liabilities at fair value through profit and loss. Derivative financial instruments are classified as current or non-current depending on whether their maturity is less or more than 12 months. Derivative instruments that qualify to be treated as hedging instruments for non-current assets are classified as non-current assets or liabilities, depending on whether their values are positive or negative.

The criteria for recognising gains or losses arising from changes in the fair value of derivatives depend on whether the derivative instrument complies with hedge accounting criteria and, where applicable, on the nature of the hedging relationship.

Changes in the fair value of derivatives that qualify for hedge accounting, have been allocated as cash flow hedges and are highly effective, are recognised in equity. The ineffective portion of the hedging instrument is taken directly to consolidated profit and loss. When the forecast transaction or the firm commitment results in the recognition of a non-financial asset or liability, the gains or losses accumulated in equity are taken to the consolidated income statement during the same period in which the hedging transaction has an impact on the net profit or loss.

At the inception of the hedge the Group formally allocates and documents the hedging relationship between the derivative and the hedged item, as well as the objectives and risk management strategies applied on establishing the hedge. This documentation includes the identification of the hedging instrument, the hedged item or transaction and the nature of the hedged risk. The documentation also considers the measures taken to assess the effectiveness of the hedge in terms of covering the exposure to changes in the hedged item, whether with respect to its fair value or attributable cash flows. The effectiveness of the hedge is assessed prospectively and retrospectively, both at the inception of the hedging relationship and systematically over the period of allocation.

Hedge accounting criteria cease to be applied when the hedging instrument expires or is sold, cancelled or settled, or when the hedging relationship no longer complies with the criteria to be accounted for as such, or the instrument is no longer designated as a hedging instrument. In these cases, the accumulated gain or loss on the hedging instrument that has been recognised in equity is not taken to profit or loss until the forecast or committed transaction impacts on the Group's results. However, if the transaction is no longer considered probable, the accumulated gains or losses recognised in equity are immediately transferred to the consolidated income statement.

The fair value of the Group's derivatives portfolio reflects estimates based on calculations performed using observable market data and the specific tools used widely among financial institutions to value and manage derivative risk.

p) Parent own shares

The Group's acquisition of equity instruments of the Parent is recognised separately at cost of acquisition in the consolidated statement of financial position as a reduction in equity, irrespective of the reason for the purchase. Any gains or losses on transactions with own equity instruments are not recognised in consolidated profit and loss.

The subsequent redemption of the Parent instruments entails a capital reduction equivalent to the par value of the shares, and the posititive or negative difference between the acquisitaion price and the par value of the shares, which should be debited on credited on the reserves account.

Any positive or negative difference between the purchase price and the par value of the shares is debited or credited to reserves. Transaction costs related to own equity instruments, including issue costs related to a business combination, are accounted for as a reduction in equity, net of any tax effect.

Parent own shares are recognised as a component of consolidated equity at their total cost.

Contracts that oblige the Group to acquire own equity instruments, including non-controlling interests, in cash or through the delivery of a financial asset, are recognised as a financial liability at the fair value of the amount redeemable against reserves. Transaction costs are likewise recognised as a reduction in reserves. Subsequently, the financial liability is measured at amortised cost or at fair value through consolidated profit or loss in line with the redemption conditions. If the Group does not ultimately exercise the contract, the carrying amount of the financial liability is reclassified to reserves.

q) Distributions to shareholders

Dividends, whether in cash or in kind, are recognised as a reduction in equity when approved by the shareholders at their annual general meeting.

r) Employee benefits

Defined benefit plans

The Group includes plans financed through the payment of insurance premiums under defined benefit plans where a legal or constructive obligation exists to directly pay employees the committed benefits when they become payable or to pay further amounts in the event that the insurance company does not pay the employee benefits relating to employee service in the current and prior periods.

Defined benefit liabilities recognised in the consolidated statement of financial position reflect the present value of defined benefit obligations at the reporting date, minus the fair value at that date of plan assets.

In the event that the result of the operations described in the paragraph above is negative, i.e. it results in an asset, the Group recognises the resulting asset up to the limit of the present value of any economic benefits available in the form of refunds from the plan or reductions in future contributions to the plan. Economic benefits are available to the Group when they are realisable at some point during the life of the plan or on settlement of plan liabilities, even when not immediately realisable at the reporting date.

Income or expense related to defined benefit plans is recognised as employee benefits expense and is the sum of the net current service cost and the net interest cost of the net defined benefit asset or liability. Remeasurements of the net defined benefit asset or liability are recognised in other comprehensive income , comprising actuarial gains and losses, return on plan assets and any change in the effect of the asset ceiling, excluding amounts included in net interest on the net defined benefit liability or asset. The costs of managing the plan assets and any tax payable by the plan itself, other than tax included in the actuarial assumptions, are deducted when determining the return on plan assets. Any amounts deferred in other comprehensive income are reclassified to retained earnings during that year.

The Group recognises the past service cost as an expense for the year at the earlier of when the plan amendment or curtailment occurs and when the Group recognises related restructuring costs or termination benefits.

The present value of defined benefit obligations is calculated annually by independent actuaries using the Projected Unit Credit Method. The discount rate of the net defined benefit asset or liability is calculated based on the yield on high quality corporate bonds of a currency and term consistent with the currency and term of the post-employment benefit obligations.

The fair value of plan assets is calculated applying the principles of IFRS 13 Fair Value Measurement. In the event that plan assets include insurance policies that exactly match the amount and timing of some or all of the benefits payable under the plan, the fair value of the insurance policies is equal to the present value of the related obligations.

The Group only offsets an asset relating to one plan against the liability of another plan provided that it has a legally enforceable right to use a surplus in one plan to settle its obligation under the other plan, and when it intends to settle the obligation on a net basis, or to realise the surplus on one plan and settle its obligation under the other plan simultaneously.

Assets and liabilities arising from defined benefit plans are recognised as current or non-current based on the period of realisation of related assets or settlement of related liabilities.

Termination benefits

Termination benefits paid or payable that do not relate to restructuring processes in progress are recognised when the Group is demonstrably committed to terminating the employment of current employees prior to retirement date. The Group is demonstrably committed to terminating the employment of current employees when it has a detailed formal plan and is without realistic possibility of withdrawing or changing the decisions made.

Restructuring-related termination benefits

Restructuring-related termination benefits are recognised when the Group has a constructive obligation, that is, when it has a detailed formal plan for the restructuring and there is valid expectation on the part of those affected that the restructuring will be carried out because the Group has already started to implement the plan or has announced its main features to those affected by it.

Employee benefits

The Group recognises the expected cost of short-term employee benefits in the form of accumulating compensated absences when the employees render service that increases their entitlement to future compensated absences. In the case of non-accumulating compensated absences, the expense is recognised when the absences occur.

s) Provisions

Provisions are recognised when the Group has a present obligation (legal or implicit) as a result of a past event, the settlement of which requires an outflow of resources which is probable and can be estimated reliably. If it is virtually certain that some or all of a provisioned amount will be reimbursed by a third party, for example through an insurance contract, an asset is recognised in the consolidated statement of financial position and the related expense is recognised in the consolidated income statement, net of the foreseen reimbursement. If the time effect of money is material, the provision is discounted, recognising the increase in the provision due to the time effect of money as a finance cost.

The Group is undergoing legal proceedings and tax inspections in a number of jurisdictions. As a result, management uses significant judgement when determining whether it is probable that the process will result in an outflow of resources and when estimating the amount, so that the relevant provision can be made if necessary. The Group recognises a provision if it is probable that an obligation will exist at year end which will give rise to an outflow of resources embodying economic benefits provided that the outflow can be reliably measured.

Assessments of the existence of provisions for onerous contracts are based on the present value of unavoidable costs, determined as the lower of the contract costs, net of any income that could be generated, and any compensation or penalties payable for non-completion.

t) Share-based payments for goods and services

(i) Equity-settled share-based payment transactions

The Group recognises personnel expenses for services rendered as they are accrued over the period in which the equity instruments vest, as well as the corresponding increase in equity, under the caption Other equity instruments at the fair value of the equity instruments at the award date.

If the equity instruments granted vest immediately on the grant date, the services received are recognised in full, with a corresponding increase in equity;

If the equity instruments granted do not vest until the employees complete a specified period of service, those services are accounted for during the vesting period, with a corresponding increase in equity.

The Group determines the fair value of the instruments granted to employees by reference to the market quotation value at the grant date.

Market conditions and other non-vesting conditions are taken into account when assessing the fair value of the instrument. Other vesting conditions are taken into account by adjusting the number of equity instruments included in the measurement of the transaction amount so that, ultimately, the amount recognised for services received is based on the number of equity instruments expected to vest. Consequently, the Group recognises the amount for the services received during the vesting period based on the best available estimate of the number of equity instruments expected to vest and revises that estimate if subsequent information indicates that the number of equity instruments expected to vest differs from previous estimates.

The average number of shares expected to be delivered is calculated with the help of an independent expert, who performs the following:

Regular updating of all relevant information for valuations taking into account the characteristics of the Plan, and information on the variable metrics of DIA and comparable companies.

Application of a mathematical model, jointly modelling the financial variables using stochastic simulation techniques (Monte Carlo) to obtain the average number of shares expected to be handed over.

If the service period is prior to the plan award date, the Group estimates the fair value of the consideration payable, to be reviewed on the plan award date itself.

Once the services received and the corresponding increase in equity have been recognised, no additional adjustments are made to equity after the vesting date, although any necessary reclassifications in equity may be made.

When the shares are handed over, the difference between the amount at which own shares acquired are booked and the amount recognised as Other equity instruments is taken to reserves. Shares granted to employees are net of withholdings applicable, calculated based on the fair value of the shares at the delivery date.

Management is required to provide an opinion on and estimate the total obligation derived from these plans and the part of this obligation accrued at 31 December 2017 based on the extent to which the conditions for receipt have been met (see note 18).

(ii) Tax effect

In accordance with prevailing tax legislation in Spain and other countries in which the Group operates, costs settled through the delivery of share-based instruments are deductible in the tax period in which delivery takes place, in which case a temporary difference arises as a result of the time difference between the accounting recognition of the expense and its tax-deductibility.

u) Grants, donations and bequests

Grants, donations and bequests are recorded as a liability when, where applicable, they have been officially awarded and the conditions attached to them have been met or there is reasonable assurance that they will be received.

Monetary grants, donations and bequests are measured at the fair value of the sum received, whilst non-monetary grants, donations and bequests received are accounted for at fair value.

In subsequent years, grants, donations and bequests are recognised as income as they are applied.

Capital grants are recognised as income over the same period and in the proportions in which depreciation on those assets is charged or when the assets are disposed of, derecognised or impaired.

v) Income tax

Income tax in the consolidated income statement comprises total debits or credits deriving from income tax paid by Spanish Group companies and those of a similar nature of foreign entities.

The income tax expense for each year comprises current tax and, where applicable, deferred tax.

Current tax assets or liabilities are measured at the amount expected to be paid to or recovered from the taxation authorities. The tax rates and tax laws used to calculate these amounts are those that have been enacted or substantially enacted at the reporting date.

Deferred tax liabilities reflect income tax payable in future periods in respect of taxable temporary differences while Deferred tax assets reflect income tax recoverable in future periods in respect of deductible temporary differences, tax loss carryforwards pending offset and unused tax credits. Temporary differences are differences between the carrying amount of an asset or liability and its tax base.

The Group calculates deferred tax assets and liabilities using the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on tax rates and tax laws that have been enacted or substantially enacted at the end of the reporting period.

Deferred tax assets and liabilities are not discounted at present value and are classified as non-current irrespective of the reversal date.

At each close the Group analyses the carrying amount of the deferred tax assets recognised and makes the necessary adjustments where doubts exist regarding their future recovery. Deferred tax assets not recognised in the consolidated statement of financial position are also re-evaluated at each accounting close and are recognised when their recovery through future tax profits appears likely, as specified in note 2.4 (a).

Current and deferred tax are recognised as income or expense and included in profit or loss for the year, except to the extent that the tax arises from a transaction or event which is recognised, in the same or a different year, directly in equity, or from a business combination.

The Group only offsets tax assets and liabilities if they have a legally enforceable right to offset the recognised amounts and it intends to either settle on a net basis or realise the assets and settle the liabilities simultaneously.

The Group only offsets deferred tax assets and liabilities if the right to offset current tax assets and liabilities has been legally recognised and the deferred tax assets and liabilities are assessed by the same taxation authority and are levied on the same entity, and where the tax authorities permit the entity or a group of entities to settle on a net basis, or to realise the asset and settle the liability simultaneously for each of the future years in which significant amounts of deferred tax assets or liabilities are expected to be recovered or settled.

Deferred tax assets and liabilities are recognised in the consolidated statement of financial position under non-current assets or liabilities, irrespective of the expected date of recovery or settlement.

w) Segment reporting

An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, whose operating results are regularly reviewed by the Group's chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available.

x) Classification of assets and liabilities as current and non-current

The Group classifies assets and liabilities in the consolidated statement of financial position as current and non-current. Current assets and liabilities are determined as follows:

Assets are classified as current when they are expected to be realised or are intended for sale or consumption in the Group's normal operating cycle, they are held primarily for the purpose of trading, they are expected to be realised within 12 months after the reporting date or are cash or a cash equivalent, unless the assets may not be exchanged or used to settle a liability for at least 12 months after the reporting date.

Liabilities are classified as current when they are expected to be settled in the Group's normal operating cycle, they are held primarily for the purpose of trading, they are due to be settled within 12 months after the reporting date or the Group does not have an unconditional right to defer settlement of the liability for at least 12 months after the reporting date.

y) Environmental issues

The Group takes measures to prevent, reduce or repair the damage caused to the environment by its activities.

Expenses derived from environmental activities are recognised as other operating expenses in the period in which they are incurred. The Group recognises environmental provisions if necessary.

z) Related party transactions

Sales to and purchases from related parties are carried out under the same conditions as those existing in transactions between independent parties.

aa) Interest

Interest is recognised using the effective interest method. The effective interest rate is the rate that exactly discounts estimated future cash flows through the expected life of a financial instrument to the net carrying amount of that financial instrument based on the contractual terms of the instrument and not considering future credit losses.

4. Information on operating segments

In terms of the criteria for aggregation of operating segments, the DIA Group’s internal organisation is based on the maturity of the markets in which it operates. These management criteria have led to the existence of two segments, Iberia and Emerging countries, with similar economic characteristics; specifically, commercial penetration of organised distribution in each of the markets, inflation rates and potential overall growth (GDP, consumer spending, etc.). In the Emerging countries segment, the countries are characterised by developing markets with a significant growth potential, whereas in the Iberia segment, the countries are more mature, with more saturated markets, and therefore, less growth potential.

The Group is organised into business units, based on the countries in which it operates, and has two reporting segments:

Iberia (Spain, Portugal and Switzerland).

Emerging Countries (Brazil, Argentina, Paraguay and China).

Management monitors the operating results of its business units separately in order to make decisions on resource allocation and performance assessment. Segment performance is evaluated based on operating profit or loss (EBITDA). However, Group financing (including finance costs and finance income) and income taxes are managed at Group level and are not allocated to operating segments.

Transfer prices between operating segments are on an arm's length basis similar to transactions with third parties.

Details of the key indicators expressed by segment are as follows:

Thousands of Euros at 31st December 2017

Segment - Iberia

Segment - Emerging

Consolidated

Sales (1)

5,505,621

3,114,929

8,620,550

EBITDA

374,868

138,732

513,600

% of sales

6.8%

4.5%

6.0%

Non-current assets

1,861,673

501,182

2,362,855

Liabilities

2,542,695

757,496

3,300,191

Acquisition of non-current assets

165,021

137,626

302,647

Number of outlets (2)

5,343

2,045

7,388

Thousands of Euros at 31st December 2016

Segment - Iberia

Segment - Emerging

Consolidated

Sales (1)

5,746,449

2,922,808

8,669,257

EBITDA

446,597

114,332

560,929

% of sales

7.8%

3.9%

6.5%

Non-current assets

1,925,491

537,662

2,463,153

Liabilities

2,517,070

869,469

3,386,539

Acquisition of non-current assets

225,774

119,589

345,363

Number of outlets (2)

5,498

1,922

7,420

(1) Sales eliminations arising from consolidation are included in segment Iberia. (2) Number of own stores and franchised at the closing date excluding China.

Details of EBITDA by consolidated income statement item are as follows:

Thousands of Euros

2016

2017

Results from operating activities

309,538

247,073

Amortisation, depreciation and impairment

(240,580)

(248,799)

Losses on disposal of fixed assets

(10,811)

(17,728)

Total EBITDA

560,929

513,600

Details of revenues and non-current assets (except for financial assets and deferred tax assets), by country, are as follows:

Thousands of Euros

Sales

Tangible and intangible assets

2016

2017

2016

2017

Spain

5,064,516

4,827,371

1,336,634

1,281,898

Portugal

681,932

678,250

264,168

259,830

Argentina

1,310,881

1,391,304

154,407

140,143

Paraguay

56

340

-

-

Brazil

1,611,872

1,723,285

291,056

277,928

China

-

-

18,133

-

Switzerland

-

-

3

2

Total

8,669,257

8,620,550

2,064,401

1,959,801

5. Property, plant and equipment

Details of property, plant and equipment and movements are as follows:

Thousands of Euros

Land

Buildings

Equipment, fixtures and fittings and machinery

Other installations, utensils and furniture

Tangible assets in progress and advances given

Other fixed assets

Total

Cost

At 1st January 2016

146,839

1,200,319

1,352,528

109,360

77,222

132,128

3,018,396

Additions

802

72,484

159,344

21,860

47,037

31,280

332,807

Disposals

(10,055)

(17,394)

(24,567)

(2,837)

(334)

(7,606)

(62,793)

Transfers

107

49,384

81,529

4,786

(100,470)

12,280

47,616

Other movements

-

-

-

(15)

-

-

(15)

Translation differences

2,350

18,200

20,390

4,494

5,110

5,379

55,923

At 31st December 2016

140,043

1,322,993

1,589,224

137,648

28,565

173,461

3,391,934

Additions

750

70,511

135,024

18,344

43,087

16,530

284,246

Disposals

(18,098)

(44,653)

(35,266)

(11,046)

(309)

(7,290)

(116,662)

Transfers

-

16,238

14,559

2,975

(35,372)

1,494

(106)

Transfers to assets held for sale (note 13)

-

(16,424)

(19,781)

(8,321)

(146)

(3,764)

(48,436)

Translation differences

(1,875)

(46,226)

(46,605)

(13,669)

(4,865)

(7,831)

(121,071)

At 31st December 2017

120,820

1,302,439

1,637,155

125,931

30,960

172,600

3,389,905

Depreciation

At 1st January 2016

-

(579,494)

(885,692)

(50,613)

-

(110,524)

(1,626,323)

Amortisation and depreciation (note 19.5)

-

(56,489)

(131,490)

(13,196)

-

(16,968)

(218,143)

Disposals

-

2,281

16,041

1,169

-

7,182

26,673

Transfers

-

(18,844)

(27,245)

(2,784)

-

(555)

(49,428)

Other movements

-

(2,313)

(2,435)

(802)

-

(250)

(5,800)

Translation differences

-

(4,360)

(12,138)

(1,464)

-

(2,920)

(20,882)

At 31st December 2016

-

(659,219)

(1,042,959)

(67,690)

-

(124,035)

(1,893,903)

Amortisation and depreciation (note 19.5)

-

(55,605)

(135,973)

(14,297)

-

(19,122)

(224,997)

Disposals

-

16,055

23,729

9,360

-

6,671

55,815

Transfers

-

(634)

3,149

(3,422)

-

(8)

(915)

Other movements

-

(421)

(573)

(198)

-

(69)

(1,261)

Transfers to assets held for sale (note 13)

10,394

13,619

4,276

-

3,318

31,607

Translation differences

-

7,419

19,717

5,438

-

4,375

36,949

At 31st December 2017

-

(682,011)

(1,119,291)

(66,533)

-

(128,870)

(1,996,705)

Impairment

At 1st January 2016

(612)

(14,711)

(4,705)

(32)

-

(3)

(20,063)

Allowance (note 19.5)

-

(9.515)

(5.719)

(1)

-

(2)

(15.237)

Distribution

-

2,002

1,122

-

-

(2)

3,126

Reversals (note 19.5)

-

1,778

855

-

-

-

2,633

Other movements

-

-

(12)

-

-

-

(12)

Transfers

-

748

24

23

-

-

795

Translation differences

-

(186)

(9)

-

-

(3)

(195)

At 31st December 2016

(612)

(19,884)

(8,444)

(10)

-

(7)

(28,953)

Allowance (note 19.5)

-

(10,183)

(3,296)

(6)

-

-

(13,492)

Distribution

-

4,863

1,591

6

-

-

6,460

Reversals (note 19.5)

-

4,598

862

-

-

-

5,460

Transfers

-

529

386

-

-

-

915

Transfers to assets held for sale (note 13)

-

193

-

193

Translation differences

-

175

4

-

-

1

180

At 31st December 2017

(612)

(19,902)

(8,704)

(10)

-

(9)

(29,237)

Net carrying amount

At 31st December 2016

139,431

643,890

537,821

69,948

28,565

49,423

1,469,078

At 31st December 2017

120,208

600,526

509,160

59,388

30,960

43,721

1,363,963

Additions in property, plant and equipment in the Group during 2017 and 2016 mainly comprise refurbishments, remodelling and the opening of new stores to new formats, as follows:

Thousands of Euro

2016

2017

Iberia

215,887

149,846

Emerging

116,920

134,400

Total

332,807

284,246

Disposals for 2017 and 2016 primarily comprise the assets relating to the sale of certain warehouses and stores owned by the DIA Group and their subsequent leases and also items replaced as a result of the aforementioned improvements and disposals due to store closures.

Note 19.5 includes the impairment of property, plant and equipment recorded in 2017 and 2016 under the income statement caption Amortisation and impairment. The impairment has been recognised at CGU level based on Management estimates, in line with the criteria defined in note 3 j) (ii).

Details of the cost of fully depreciated property, plant and equipment in use at 31 December are as follows:

Thousands of Euros at 31 December

2016

2017

Buildings

341,068

341,822

Equipment, fixtures and fittings and machinery

718,841

742,273

Other installations, utensils and furniture

29,501

25,207

Other fixed assets

95,398

90,558

Total

1,184,808

1,199,860

The Group has taken out insurance policies to cover the risk of damage to its property, plant and equipment. The coverage of these policies is considered sufficient.

The composition of payments for investments in property, plant and equipment recorded in the cash flow statement is as follows:

Thousands of Euro

2016

2017

Adictions property, plant and equipment

332,807

284,246

Variation suppliers of fixed assets

621

(22,051)

Total

333,428

262,195

Finance leases

Finance leases have been arranged for the stores at which the Group's principal activities are carried out. There are also finance leases for technical installations, machinery and other fixed assets (vehicles). Details of items of property, plant and equipment under finance leases and hire purchase contracts are as follows:

Thousands of Euros

2016

2017

Land

176

176

Cost

176

176

Buildings

481

435

Cost

527

527

Accumulated depreciation

(46)

(92)

Equipment, fixtures and fittings and machinery

29,350

25,267

Cost

46,407

47,567

Accumulated depreciation

(17,057)

(22,300)

Other installations, utensils and furniture

3

-

Cost

4

-

Accumulated depreciation

(1)

-

Other fixed assets (transports)

12,422

10,712

Cost

15,902

17,708

Accumulated depreciation

(3,480)

(6,996)

Net carrying amount

42,432

36,590

The amount of the cost indicated in the previous breakdown corresponds, in every case, with the fair value of the assets at the date on which the financial lease contracts were signed.

Future minimum lease payments under finance leases, together with the present value of the net minimum lease payments, are as follows:

2016

2017

Thousands of Euros

Minimum payments

Present value

Minimum payments

Present value

Less than one year

13,420

11,634

11,978

10,547

Two to five years

30,088

27,480

26,063

24,109

More than 5 years

3,963

3,825

2,177

2,120

Total minimum payments and present value

47,471

42,939

40,218

36,776

Less current portion (note 15.1)

(13,420)

(11,634)

(11,978)

(10,547)

Total non-current (note 15.1)

34,051

31,305

28,240

26,229

Future minimum lease payments are reconciled with their present value as follows:

Thousands of Euros

2016

2017

Minimum future payments

47,448

40,195

Purchase option

23

23

Unaccrued finance expenses

(4,532)

(3,442)

Present value

42,939

36,776

6. Intangible assets

6.1. Goodwill

Details of goodwill by operating segment before aggregation and movement during the period are as follows:

Thousands of Euros

Spain

Portugal

Total

Net goodwill at 31/12/2015

518,309

39,754

558,063

Additions to the consolidated group

1,208

-

1,208

Disposals

(1,158)

-

(1,158)

Provision for impairment (note 19.5)

(295)

-

(295)

Net goodwill at 31/12/2016

518,064

39,754

557,818

Disposals

(99)

-

(99)

Provision for impairment (note 19.5)

(4,590)

-

(4,590)

Net goodwill at 31/12/2017

513,375

39,754

553,129

The goodwill reported by the Group relates to the following business combinations:

Thousands of Euros

Generarion year

Thousands of Euros

Acquisition of stores to Grupo Eroski

2015

91,695

Acquisition of assets to Mobile Dreams Factory Marketing, S.L.

2015

2,174

Acquisition company Grupo El Arbol, S.A.

2014

155,112

Acquisition of stores to Schlecker, S.A.

2013

48,591

Acquisition company Plus Supermercados, S.A.

2007

160,553

Acquisition of stores to Champion, S.A. and Supeco, S.L.

2006

15,100

Acquisition of stores to Dinosol, S.L.

2006

10,944

Acquisition company Distribuciones Reus, S.A.

1991

26,480

Other acquisitions of stores

Various

2,726

Total goodwill arising on consolidation in Spain

513,375

Acquisition company Portuguesa de Lojas de Desconto,S.A.

1998

39,754

Total goodwill arising on consolidation in Portugal

39,754

For impairment testing purposes, goodwill has been allocated to DIA's cash-generating units up to country level.

The recoverable amount of a group of CGUs is determined based on its value in use. These calculations are based on cash flow projections from the five-year financial budgets approved by management. Cash flows beyond this five-year period are extrapolated using the estimated growth rates indicated below. The growth rate should not exceed the average long-term growth rate for the distribution business in which the Group operates.

The impairment provision in 2017, amounting to Euros 4,590 thousand, corresponds to 11 stores, (in 2016 impairment was Euros 295 thousand and corresponded to one store which was closed in 2017).

The following main assumptions are used to calculate value in use:

Spain

Portugal

2016

2017

2016

2017

Sales growth rate (1)

1.60%

3.80%

4%

3.70%

Growth rate (2)

2%

2%

2%

2%

Discount rate (3)

6.42%

7.11%

7.85%

8.70%

(1) Weighted average annual growth rate of sales for the five-year projected period (2) Weighted average growth rate used to extrapolate cash flows beyond the budgeted period (3) Pre-tax discount rate applied to cash flow projections.

The rise in the average annual growth rate for Spain is due to the increased number of store openings planned for the coming years in the new formats.

These assumptions have been used to analyse each group of CGUs within the business segment.

The Group determines budgeted weighted average sales growth based on estimated future performance and market forecasts.

Group management considers that the average weighted growth rates for sales over the next five years are consistent with past performance, taking into account expansion plans, store refits to new formats and trends in macroeconomic indicators (population, inflation in food prices, etc.).

According to the assumptions used to forecast cash flows, the gross margin will remain stable throughout the budgeted period.

The weighted average growth rates of cash flows in perpetuity are consistent with the forecasts for the industry's expected evolution. The discount rates used are pre-tax values calculated by weighting the cost of equity against the cost of debt using the average industry weighting. The cost of equity in each country is calculated considering the following factors: the risk-free rate of the country, the industry adjusted beta, the market risk differential and the size of the company.

In all cases sensitivity analyses are performed in relation to the discount rate used and the growth rate of cash flows in perpetuity to ensure that reasonable changes in these assumptions would not have an impact on the possible recovery of the goodwill recognised. Specifically, a variation of 200 basis points in the discount rate used, a 0% growth rate of income in perpetuity, a 20 bps fall in the EBITDA margin or a 1% reduction in the average growth rate of sales, would not result in the impairment of any of the goodwill recognised.

For all the other countries, the following assumptions are used to calculate value in use of property, plant and equipment and intangible assets:

Argentina

Brazil

2016

2017

2016

2017

Growth rate (2)

2%

2%

2%

2%

Discount rate (3)

10.26%

10.82%

9.43%

9.79%

6.2 Other intangible assets

Details of other intangible assets and movements are as follows:

Thousands of Euros

Development cost

Industrial property

Leaseholds

Computer software

Other intangible assets

Total

Cost

At 1st January 2016

4,818

8,196

27,102

34,184

15,550

89,850

Additions/Internal development

7,065

477

-

3,409

397

11,348

Disposals

-

-

(345)

(423)

(197)

(965)

Transfers

(2,507)

1,272

(2,310)

2,049

2,513

1,017

Translation differences

-

-

-

553

349

902

At 31st December 2016

9,376

9,945

24,447

39,772

18,612

102,152

Additions/Internal development

11,167

1,156

-

5,024

1,054

18,401

Disposals

-

(925)

(4,000)

(788)

(2,368)

(8,081)

Transfers

(5,439)

21

2,688

5,436

(2,600)

106

Transfers to assets held for sale (note 13)

-

-

-

(3,048)

-

(3,048)

Translation differences

-

-

-

(1,149)

(437)

(1,586)

At 31st December 2017

15,104

10,197

23,135

45,247

14,261

107,944

Depreciation

At 1st January 2016

-

(2,897)

(21,879)

(24,609)

(5,308)

(54,693)

Amortisation and depreciation (note 19.5)

-

(1,839)

(1,065)

(5,780)

(503)

(9,187)

Disposals

-

-

345

386

-

731

Other movements

-

-

-

(495)

-

(495)

Translation differences

-

-

-

(323)

(133)

(456)

At 31st December 2016

-

(4,736)

(22,599)

(30,821)

(5,944)

(64,100)

Amortisation and depreciation (note 19.5)

-

(2,033)

(975)

(6,966)

(541)

(10,515)

Disposals

-

925

3,869

787

2,093

7,674

Transfers

-

-

(34)

-

(3)

(37)

Transfers to assets held for sale (note 13)

-

-

-

2,000

-

2,000

Other movements

-

-

-

(137)

-

(137)

Translation differences

-

-

-

578

112

690

At 31st December 2017

-

(5,844)

(19,739)

(34,559)

(4,283)

(64,425)

Impairment

st January 2016

-

-

(51)

-

(343)

(394)

Allowance (note 19.5)

-

-

(13)

-

(338)

(351)

Distribution

-

-

-

-

198

198

At 31st December 2016

-

-

(64)

-

(483)

(547)

Allowance (note 19.5)

-

-

(10)

-

(655)

(665)

Distribution

-

-

3

-

362

365

Transfers

-

-

34

-

3

37

At 31st December 2017

-

-

(37)

-

(773)

(810)

Net carrying amount

At 31st December 2016

9,376

5,209

1,784

8,951

12,185

37,505

At 31st December 2017

15,104

4,353

3,359

10,688

9,205

42,709

Additions in intangible assets in the Group during 2017 and 2016 mainly comprise the development of IT projects carried out in-house in Iberia. Computer software was also acquired. Details are as follows:

Thousands of Euro

2016

2017

Iberia

9,887

15,175

Emerging

2,669

3,226

Total

12,556

18,401

Note 19.5 includes the impairment of intangible assets recorded in 2017 and 2016 under the income statement caption Amortisation and impairment.

Details of fully amortised intangible assets at each year end are as follows:

Thousands of Euros

2016

2017

Computer software

32,382

26,363

Leaseholds and other

15,053

3,437

Total

47,435

29,800

7. Operating leases

The Group has approximately 8,000 operating leases in place. In general terms, the operating leases on stores only establish the payment of a fixed monthly charge which is reviewed annually in line with and index linked to the rate of inflation. Operating leases generally do not include clauses establishing variable amounts such as turnover-based fees, or contingent rent amounts.

Leases on warehouses generally have the same characteristics as for stores. The Group has purchase options on several warehouse leases, which are included in off-balance sheet commitments (see note 20.1).

During 2017 and 2016 sale and leaseback contracts were signed for certain warehouses and stores with terms of between 20 and 25 years and a minimum tie-in period of between 2 and 10 years (see notes 5 and 19.1).

Details of the main operating lease contracts in force at 31 December 2017 are as follows:

Warehouse

Country

Minimum lease period

Getafe

Spain

2026

Mallén

Spain

2023

Manises

Spain

2018

Mejorada del Campo

Spain

2024

Miranda

Spain

2018

Orihuela

Spain

2023

Sabadell

Spain

2029

San Antonio

Spain

2023

Tarragona

Spain

2018

Villanubla

Spain

2,019

Villanueva de Gállego

Spain

2023

Santander

Spain

2018

Granda-Siero

Spain

2020

Almería

Spain

2018

Salamanca

Spain

2018

Azuqueca

Spain

2018

Dos Hermanas

Spain

2027

Santiago

España

2020

Albufeira

Portugal

2018

Loures

Potugal

2020

Grijó

Portugal

2021

Anhanghera

Brazil

2018

Guarulhos

Brazil

2018

Americana

Brazil

2018

Porto Alegre

Brazil

2018

Ribeirao Preto

Brazil

2018

Belo Horizonte

Brazil

2018

Mauá

Brazil

2020

Avellaneda

Argentina

2018

Operating lease payments are recognised in the consolidated income statement as follows:

Thousands of Euros

2016

2017

Lease payments, property (note 19.4)

297,296

316,611

Lease payments, furniture and equipment (note 19.4)

5,563

5,997

Total

302,859

322,608

Future minimum payments under non-cancellable operating leases are as follows:

Thousands of Euros

2016

2017

Less than one year

103,823

109,030

One to five years

93,931

117,356

Over five years

39,792

60,234

Total minimum lease payments, property

237,546

286,620

Less than one year

1,870

1,737

One to five years

2,244

1,406

Over five years

26

-

Total minimum lease payments, furniture and equipment

4,140

3,143

The majority of the lease contracts signed by the Group contain clauses allowing them to be terminated at any time throughout their useful lives, once the mandatory tie-in period has elapsed, by informing the lessor of this decision with the agreed period of notice, which is generally under three months. Total lease commitments amount to a similar amount to annual lease expenses.

Sublease revenues amount to Euros 30,455 thousand (Euros 26,415 thousand at 31 December 2016) (see note 19.1) and comprise revenues from rights-of-use transferred to franchisees, as well as the amounts received from concessionaires to carry out their activities. In general terms, the duration of these contracts is under one year, tacitly renewable in those that establish a monthly fixed rent with an additional turnover-based fee. The consolidated income statement does not include any contingent income in respect of these contracts.

8. Financial assets

Details of financial assets in the consolidated statements of financial position at 31 December are as follows:

Thousands of Euros

2016

2017

Non-current assets

Trade and other receivables

69,345

73,084

Non-current financial assets

58,657

75,013

Consumer loans from financing activities

401

-

Current assets

Trade and other receivables

167,279

221,846

Consumer loans from financing activities

6,220

1,070

Other current financial assets

19,734

18,430

TOTAL

321,636

389,443

8.1. Trade and other receivables

Details of trade and other receivables are as follows:

Thousands of Euros

2016

2017

Trade and other receivables

69,345

73,084

Total non-current

69,345

73,084

Trade and other receivables

102,558

122,656

Other receivables

19,099

20,963

Receivables from suppliers

38,061

72,709

Advances to suppliers

2,709

2,840

Receivables from associates companies (note 21)

4,852

2,678

Total current

167,279

221,846

a) Trade receivables

This balance comprises current and non-current trade receivables for merchandise sales to customers. Details are as follows:

Thousands of Euros

2016

2017

Trade and other receivables non current (note 22d))

69,345

73,084

Trade and other receivables current (note 22d))

132,303

157,149

Total Trade and other receivables

201,648

230,233

Impairment loss (note 8.1 d))

(29,745)

(34,493)

Total

171,903

195,740

These trade balances are measured at present value and have generated interest of Euros 2,382 thousand in 2017 (Euros 2,743 thousand in 2016), which has been recognised in the consolidated income statement.

b) Receivables from suppliers

This caption includes balances receivable from suppliers.

In 2017 the Group entered into agreements to transfer supplier trade receivables with and without recourse (see notes 3 (l) and 22 d)). The accrued finance cost of the transfer of these receivables amounted to Euros 240 thousand in 2017 (Euros 139 thousand in 2016) (see note 19.7). The transferred receivables that had not yet fallen due at 31 December 2017 totalled Euros 99,624 thousand (Euros 88,449 thousand in 2016) and all were considered to be without recourse.

c) Trade debts with other related parties

During 2017, transactions have been carried out with the companies ICDC, Red Libra and CD Supply Innovation (see note 21), mainly corresponding to trade operations.

d) Impairment

Movements in the provision for impairment of receivables (see other disclosures on credit risk in note 22 d)) were as follows:

2017

Thousands of Euros

Customer for sales (note 8.1 a) and 22 d))

Other debtors

Credits receivable from suppliers

Total

At 1st January

(29,745)

(7,446)

(6,288)

(43,479)

Charge

(16,914)

(983)

(2,990)

(20,887)

Applications

5,258

417

2,902

8,577

Reversals

2,655

-

245

2,900

Transfers

(33)

33

-

-

Transfers to assets held for sale

-

-

189

189

Translation differences

4,286

-

25

4,311

At 31st December

(34,493)

(7,979)

(5,917)

(48,389)

2016

Thousands of Euros

Customer for sales (note 8.1 a) and 22 d))

Other debtors

Credits receivable from suppliers

Total

At 1st January

(21,444)

(8,478)

(7,091)

(37,013)

Charge

(13,771)

(786)

(3,940)

(18,497)

Applications

126

-

-

126

Reversals

5,995

1,818

4,838

12,651

Other movements

(47)

-

-

(47)

Translation differences

(604)

-

(95)

(699)

At 31st December

(29,745)

(7,446)

(6,288)

(43,479)

8.2 Other financial assets

Thousands of Euros

2016

2017

Equity instruments

88

88

Guarantees

46,269

57,998

Other guarantees

2,000

2,000

Other loans

572

524

Other non-current financial assets

9,728

14,403

Total non-current

58,657

75,013

Franchise deposits (note 22 d))

2,958

3,256

Other deposits

7,366

8,541

Credits to personnel

2,920

3,027

Other loans

1,219

1,016

Loans on the sale of fixed assets

-

498

Other finantial assets

5,271

2,092

Total current

19,734

18,430

“Non-current security and other deposits” are the amounts pledged to lessors to secure lease contracts. These amounts are measured at present value and any difference with their nominal value is recognised under prepayments for current or non-current assets. The interest on these assets included in the consolidated income statement in 2017 amounted to Euros 293 thousand (Euros 495 thousand in 2016).

At 31 December 2017 and 2016, “Other non-current guarantees” consist of the amount withheld from the sellers in the acquisition of establishments from the Eroski Group, which will be released after five years, in accordance with the addendum to the framework contract signed on 7 August 2015 (see note 15.2).

In both years “Other loans” mainly consisted of loans extended by the Group to employees.

An asset derived from sales tax in Brazil is the main component of the non-current balance under “Other financial assets” in 2017 and 2016.

8.3. Current and non-current consumer loans from financing activities

In 2017, after transferring these loans to non-current assets held for sale of the company FINANDIA, EFC, the balance of this caption solely relates to DIA Argentina and comprises loans granted to individuals resident in Argentina; calculated at amortised cost, which does not differ from their fair value.

Interest and similar income from these assets recognised in the consolidated income statement at 31 December 2017 amounted to Euros 2,033 thousand (Euros 1,700 thousand at 31 December 2016) (see note 19.1).

9. Other equity-accounted investees

The balance under equity-accounted investees in 2017 and 2016 reflects the 50% investment of ICDC Services Sàrl, which began operations in the first half of 2016. In addition, in 2017 this balance includes the 50% ownership interests of the companies Red Libra Trading Services, S.L. and CD Supply Innovation, S.L., which commenced activity in the second half of 2017. Also, in 2016, DIA Paraguay's entry into the consolidated Group resulted in the acquisition of an indirect 10% interest in DIPASA (see note 1).

The key financial indicators of these companies in 2017 are as follows:

Thousands of Euros

2016

2017

Assets

28,654

255,806

Net equity

367

1,786

Sales

2,975

104,325

Profit for the period

187

578

10. Other assets

Details of other assets are as follows:

Thousands of Euros

2016 current

2017 current

Prepayments for operating leases

3,191

2,967

Prepayments for guarantees

481

373

Prepayments for insurance contracts

657

717

Other prepayments

3,811

3,330

Total other assets

8,140

7,387

11. Inventories

Details of inventories are as follows:

Thousands of Euros

2016

2017

Goods for resale

662,640

562,966

Other supplies

6,952

6,678

Total inventories

669,592

569,644

At 31 December 2017 and 2016 there are no restrictions to the availability of any inventories.

The Group has taken out insurance policies to cover the risk of damage to its inventories. The coverage of these policies is considered sufficient.

12. Cash and cash equivalents

Details of cash and cash equivalents are as follows:

Thousands of Euros

2016

2017

Cash and current account balances

165,778

288,882

Cash equivalents

198,822

51,311

Total

364,600

340,193

Balances in current accounts earn interest at applicable market rates. Current investments are made for daily, weekly and monthly periods and have generated interest ranging from 0.04% to 0.10% in 2017 and from 0.05% to 0.15% in 2016.

The balance of cash equivalents at 31 December 2017 mainly reflects the deposits maturing at under three months in Brazil. At 31 December 2016 it included deposits maturing at under three months in Spain and Brazil.

13. Disposal groups held for sale and discontinued operations

In the first quarter of 2017, the DIA Group began a process to explore strategic alternatives in its China business, classifying the assets and liabilities of its companies, DIA Tian Tian Management Consulting Service & Co. Ltd. and Shanghai DIA Retail Co. Ltd., as held for sale. In accordance with IFRS 5, the Company has discontinued the operations of its China business, re-stating the accounts for the prior year for comparability purposes (see note 1).

Furthermore, during the last quarter of 2017, the DIA Group began a process to explore strategic alternatives in the business of its financial entity, Finandia, E.F.C., S.A., classifying the assets and liabilities of this company as held for sale at 31 December 2017, in accordance with IFRS 5 (see notes 1 and 24).

The results of the Group’s discontinued operations, which correspond to the activity of the China business are as follows for 2017 and 2016:

Thousands of Euros

2016

2017

Income

199,603

181,511

Amortisation and depreciation

(5,623)

(1,345)

Expenses

(208,459)

(200,152)

Gross Margin

(14,479)

(19,986)

Financial income

433

869

Financial expenses

(1,828)

(2,317)

Loss before taxes of discontinued operations

(15,874)

(21,434)

The effect on the cash flow of the Group’s discontinued operations in 2017 and 2016 is as follows:

Thousands of Euros

2016

2017

Adjustments to Profit and Loss

8,291

1,923

Changes in working capital

5,443

(1,578)

Net cash flows used in investing activities

(1,034)

1,724

Net cash flows used in financing activities

6,643

(30,443)

Total cash flows

19,343

(28,374)

The results of activities discontinued by the Group in both years correspond in their entirety to the Parent.

Assets and liabilities classified as held for sale in 2017 are as follows:

Thousands of Euros

2017

Assets

Tangible fixed assets

16,862

Other Intangible assets

1,069

Other non-current financial assets

1,378

Consumer loans from financial activities

297

Deferred tax assets

117

Inventories

9,461

Trade and other receivables

3,683

Consumer loans from financial activities

2,590

Current tax assets

2,794

Other current financial assets

272

Other assets

1,140

Non-current assets held for sale

39,663

Liabilities

Non-current borrowings

384

Current borrowings

13,280

Trade and other payables

48,778

Deferred tax liabilities

1,082

Other financial liabilities

1,652

Liabilities directly associated with non-current assets held for sale

65,176

14. Equity

14.1. Capital

At 31 December 2017 and 2016 share capital was Euros 62,245,651.30, represented by 622,456,513 shares of Euros 0.10 par value each, subscribed and fully paid. These shares are freely transferable.

The Parent's shares are listed on the Spanish stock markets. According to public information filed with the Spanish National Securities Market Commission, the members of the board of directors control approximately 0.245% of the Parent's share capital at the date of authorising these annual accounts for issue.

According to the same public information, the most significant shareholdings at the reporting date of these annual accounts are as follows:

Letterone Investment Holdings, S.A.

25.001%

Baillie Gifford & CO

10.488%

Black Creek Investment Management INC

4.988%

Morgan Stanley

4.444%

The Goldman Sachs Group, INC

4.258%

Norges Bank

3.032%

Blackrock INC.

3.012%

LSV Asset Management

3.003%

On 28 July 2017, Letterone Investment Holdings, S.A. (hereinafter “Letterone”) reached a collateralised agreement to buy in instalments 62.2 million ordinary shares, which represents 10.0% of the share capital of the Parent, through LTS Investment S.à.r.l., a solely-owned direct subsidiary of Letterone. On 19 January 2018, the termination date of this agreement, Letterone has increased its ownership stake in DIA to 93.4 million ordinary shares, equivalent to 15.0% of the share capital of the Parent. Hence, at the date of preparation of these annual accounts, Letterone holds 25.001% of the share capital of DIA.

The Group manages its capital with the aim of safeguarding its capacity to continue operating as a going concern, so as to continue providing shareholder remuneration and benefiting other stakeholders, while maintaining an optimum capital structure to reduce the cost of capital.

To maintain and adjust the capital structure, the Group can adjust the amount of dividends payable to shareholders, reimburse capital, issue shares or dispose of assets to reduce debt.

Like other groups in the sector, the DIA Group controls its capital structure on a debt ratio basis. This ratio is calculated as net debt divided by adjusted EBITDA. Net debt is the sum of financial debt less cash and other items. Adjusted EBITDA comprises earnings before depreciation and amortisation, impairment and gains/losses on disposal of assets and other excluded elements, as stated in note 19.9.

In view of the ratios for 2017 and 2016, net debt has been calculated as follows:

Thousands of Euros

2016

2017

Total borrowings (note 15)

1,243,007

1,231,464

Less: cash and cash equivalents (note 12)

(364,723)

(340,193)

Net debt

878,284

891,271

Adjusted EBITDA (*)

627,896

568,590

Debt ratio

1.4x

1.6x

(*) Adjusted EBITDA ni note 19.9

14.2. Reserves and retained earnings

Details of reserves and retained earnings are as follows:

Thousands of Euros

2016

2017

Legal reserve

13,021

13,021

Capital redemption reserve

5,688

5,688

Other reserves non available

15,170

15,170

Other reserves

227,229

270,797

Profit attributable to equityholders ot the parent

174,043

109,579

Total

435,151

414,255

The Parent's legal reserve is appropriated in compliance with article 274 of the Spanish Companies Act, which requires that companies transfer 10% of profits for the year to a legal reserve until this reserve reaches an amount equal to 20% of share capital. The legal reserve is not distributable to shareholders and if it is used to offset losses, in the event that no other reserves are available, the reserve must be replenished with future profits. At 31 December 2017, the Parent has appropriated to this reserve more than the minimum amount required by law.

An amount equal to the par value of the own shares redeemed in 2015 and 2013 was appropriated to the redeemed capital reserve. It will only be available once the Parent meets the conditions for reducing share capital set forth in article 335.c) of the Spanish Companies Act.

Other non-distributable reserves include a Parent company reserve amounting to Euros 15,170 thousand, which is non-distributable and arose as a result of the entry into force of Royal Decree 602/2016, which eliminated the concept of intangible assets with indefinite useful lives, establishing that from 1 January 2016, these would be subject to amortisation. At 31 December 2016, after the publication of this Royal Decree, this reserve, which up to that date was on account of goodwill, was transferred to voluntary reserves, remaining non-distributable. Once the net amount of the goodwill exceeds the carrying amount, it may be transferred to freely distributable reserves.

Other reserves include the reserves of the Parent and consolidation reserves, as well as the reserve for the translation of capital into Euros, totalling Euros 62.07. This non-distributable reserve reflects the amount by which share capital was reduced in 2001 as a result of rounding off the value of each share to two decimals.

At 31 December 2017 and 2016, the Parent's distributable reserves amount to Euros 118,616 thousand and Euros 41,783 thousand, respectively.

14.3. Other own equity instruments

a) Own shares

Changes in own shares in 2017 and 2016 are as follows:

Number of shares

Euros/share

Total

31st December 2015

8,183,782

6.5448

53,560,917.32

Acquired shares

821,000

4,047,871.51

Acquired shares

3,179,000

15,855,452.31

Delivery of shares to Board Members

(79,236)

(478,732.54)

Delivery of shares to incentives plans 2011-2014 (note 18)

(998,772)

(6,414,043.32)

31st December 2016

11,105,774

5.9943

66,571,465.29

Liquidation equity swap

(2,100,000)

(12,588,053.49)

Formalisation equity swap

2,100,000

11,130,000.00

Delivery of shares to Board Members

(73,227)

(428,672.64)

Delivery of shares to incentives plans 2014-2016 (note 18)

(721,914)

(4,326,043.04)

31st December 2017

10,310,633

5.8540

60,358,696.13

Purchases carried out in 2016 were to cover the needs of the “2016-2018 Long-Term Incentive Plan” (LTIP) approved by the shareholders at the general meeting held on 22 April 2016 as remuneration for Group executives.

Shares transferred during 2017 and 2016 generated charges of Euros 559 and 3,224 thousand to other reserves.

b) Other own equity instruments

This reserve includes obligations derived from equity-settled share-based payment transactions following the approval by the board of directors and shareholders of the 2014-2016 long-term incentive plan and the 2016-2018 incentive plan (see note 18).

14.4. Dividends

Details of dividends paid are as follows:

Thousands of Euros

2016

2017

Dividends on ordinary shares

122,212

128,535

Dividend per share (in Euros)

0.20

0.21

Dividends per share (in Euros) are calculated based on the number of shares that entitle the holder to dividends at the distribution date, which in 2017 was 612,072,653 (611,055,470 shares in 2016).

The proposed distribution of the Parent's 2017 profit to be submitted to the shareholders for approval at their ordinary general meeting is as follows:

Basis of distribution

Euros

Profit for the year

88,897,812.34

Other reserves

21,288,446.06

Total

110,186,258.40

Basis of allocation

Euros

Dividends (*)

110,186,258.40

Total

110,186,258.40

(*) The directors have proposed that an ordinary dividend of Euros 0.18 (gross) be distributed for each of the shares with the corresponding economic rights. This figure is an estimate based on there being 612,145,880 shares that confer the right to receive this dividend, following any necessary corrections. This estimate may vary depending on several factors, including the volume of shares held by the Parent.

The distribution of profit for 2016, approved by the shareholders at the ordinary general meeting held on 28 April 2017, was as follows:

Basis of distribution

Euros

Profit for the year

207,384,982.56

Total

207,384,982.56

Basis of allocation

Euros

Dividends

128,535,257.13

Other reseves

78,849,725.43

Total

207,384,982.56

14.5. Earnings per share

Basic earnings per share are calculated by dividing net profit for the period attributable to the Parent by the weighted average number of ordinary shares in circulation throughout the period, excluding own shares.

The weighted average number of ordinary shares outstanding is determined as follows:

Weighted average ordinary shares in circulation at 31/12/2017

Ordinary shares at 31/12/2017

Weighted average ordinary shares in circulation at 31/12/2016

Ordinary shares at 31/12/2016

Total shares issued

622,456,513

622,456,513

622,456,513

622,456,513

Own shares

(10,571,332)

(10,310,633)

(9,276,954)

(11,105,774)

Total shares available and diluted

611,885,181

612,145,880

613,179,559

611,350,739

Details of the calculation of basic earnings per share are as follows:

Ganancias por acción básicas y diluidas

2016

2017

Average number of shares

613,179,559

611,885,181

Profit for the period in thousands of Euros

174,043

109,579

Profit per share in Euros

0.28

0.18

There are no equity instruments that could have a dilutive effect on earnings per share. Diluted earnings per share are therefore equal to basic earnings per share.

14.6. Non-controlling interests

Non-controlling interests at 31 December 2017 and 2016 reflect that held in Compañía Gallega de Supermercados, S.A.

14.7. Translation differences

Details of translation differences at 31 December 2017 and 2016 are as follows:

Thousands of Euros

2016

2017

Argentina

(36,384)

(45,178)

Brazil

(17,131)

(52,281)

China

(6,258)

(3,318)

Total

(59,773)

(100,777)

15. Financial liabilities

Details of financial liabilities in the consolidated statement of financial position at 31 December are as follows:

15.1. Borrowings

Details of borrowings are as follows:

Thousands of Euros

2016

2017

Debentures and bonds long term

794,652

892,570

Syndicated credits (Revolving credit facilities)

97,360

-

Mortgage loans

2,632

814

Other bank loans

126,351

30,842

Finance lease payables

31,305

26,229

Guarantees and deposits received

9,469

11,148

Other non-current borrowings

504

342

Total non-current borrowings

1,062,273

961,945

Debentures and bonds long term

5,587

6,021

Mortgage loans

2,218

633

Other bank loans

61,819

144,268

Other financial liabilities (note 15.1 c)

39,944

34,238

Finance lease payables

11,634

10,547

Credit facilities drawn down

41,355

65,809

Expired Interests

520

132

Guarantees and deposits received

5,817

2,813

Liabilities derivatives

6,600

4,339

Other current borrowings

5,240

719

Total current borrowings

180,734

269,519

a) Debentures and bonds

The Parent has outstanding bonds with a nominal value of Euros 905,700 thousand at 31 December 2017 (Euros 800,000 thousand at 31 December 2016), all of which were issued as part of a Euro Medium Term Note programme approved by the Central Bank of Ireland. Details of bond issues are as follows:

Maturity date in thousands of euros

Issuing Company

Issue date

Term (years)

Currency

Voucher

2019

2020

2021

2022

2023

Amount in thousands of euros

DIA, S.A.

07/04/2017

6

EUR

0.875%

-

-

-

-

300,000

300,000

DIA, S.A.

28/04/2016

5

EUR

1.000%

-

-

300,000

-

-

300,000

DIA, S.A.

22/07/2014

5

EUR

1.500%

305,700

-

-

-

-

305,700

Movement in bond issues during 2017 and 2016 is as follows:

Thousands of euros

Bonds

At 1 January 2016

500,000

Issues

300,000

At 31 December 2016

800,000

Issues

300,000

Amortization

(194,300)

At 31 December 2017

905,700

On 27 March 2017, the Parent successfully completed a bond issue amounting to Euros 300,000 thousand, with an issue price of 99.092% and an annual coupon of 0.0875%. These bonds were issued on the Irish Stock Exchange.

On 7 April 2017, a bond swap was performed on a portion of the bonds from the previous placement issued on the same day, for 1,943 bonds (nominal amount of Euros 194,300 thousand) of the issue carried out on 22 July 2014. Once the swap was completed, the acquired bonds were amortised and written off, leaving 3,057 current bonds from that placement in circulation.

This swap has been treated as a renegotiation under IAS 39, whereby an exchange of financial instruments between the borrower and the lender is carried out, the latter assuming the risk of the new issue, the risk of not completing the exchange of the amortised and issued debt and the risk of a variation in price between the bonds acquired and issued. Furthermore, the new contract is not substantially different to the original, given that the current discounted value of the cash flows on the bonds swapped under the new issue using the original interest rate differ by less than 10% from the present value of the discounted cash flows still remaining from the original swapped bonds.

As a result the original swapped bonds have been written off at their carrying value and the associated expenses have not had an impact on profit and loss.

On 18 April 2016, the Parent successfully completed a second bond issue amounting to Euros 300,000 thousand, with an issue price of 99.424% and an annual coupon of 1.000%. These bonds were issued on the Irish Stock Exchange.

b) Loans and borrowings

Syndicated loans

These types of loans have been extended to the Parent by various national and foreign entities. Details at 31 December 2017 and 2016 are as follows:

Description

Limit in thousand of euros

Currency

Outstandings in thousand of euros

Signed date

Maturity date and thousands of euros

2016

2017

Sindicated

300,000

EUR

99,000

-

21/04/2015

75,000 21/04/2018 225,000 21/04/2020

Sindicated

300,000

EUR

-

-

03/07/2014

28/06/2022

Description

Limit in thousand of euros

Currency

Outstandings in thousand of euros

Signed date

Maturity date and thousands of euros

2015

2016

Sindicated

300,000

EUR

300,000

99,000

21/04/2015

75,000 21/04/2018 225.000 21/04/2020

Sindicated

400,000

EUR

-

-

03/07/2014

03/07/2019

On 28 June 2017, the Parent signed a modification to the existing syndicated loan taken out in July 2014 and expiring on 3 July 2019. The new loan is not substantially different to the original; the amount of Euros 400,000 is reduced to Euros 300,000 and the term of the loan is extended for 5 years until 28.06.2022.

In March 2017 the second and final extension to the syndicated loan arranged in April 2015 was carried out for Euros 225,000 thousand maturing in April 2020. In March 2016 the first extension to the syndicated loan was carried out.

These loans are subject to compliance with certain covenant ratios linked thereto, as defined in the agreement. At 31 December 2017 all covenant ratios, which are calculated on the basis of the DIA Group's consolidated annual accounts, have been met. Details are as follows:

Financial covenant

Syndicated loans 2014 and 2015

Total net debt/EBITDA

< 3,50x

Total net debt and Ebitda figures are calculated according to the definition included in the syndicated contract. Thus, these figures do not agree with the figures included in the notes 4 and 14.1 in this document.

Mortgage and other bank loans

Details of the maturity of mortgage and other bank loans, grouped by type of operation and company, at 31 December 2017 and 2016 are as follows:

At 31 December 2017

Maturity in thousand of euros

Type

Owner

Currency

2018

2019

2020

2021

Total

Mortgage

Beauty by DIA

EUR

633

421

393

-

1,447

Mortgage Loans

EUR

633

421

393

-

1,447

Loan

DIA

EUR

101,046

13,413

15,000

-

129,459

Loan

DIA Brasil

EUR

40,273

-

-

-

40,273

Loan

Grupo El Arbol

EUR

501

2,000

-

-

2,501

Loan

DIA Argentina

EUR

2,448

429

-

-

2,877

Other Loans

EUR

144,268

15,842

15,000

-

175,110

At 31 December 2016

Maturity in thousand of euros

Type

Owner

Currency

2017

2018

2019

2020

Total

Mortgage

Beauty by DIA

EUR

1,324

632

421

394

2,771

Mortgage

Twins Alimentación

EUR

894

942

243

-

2,079

Mortgage Loans

EUR

2,218

1,574

664

394

4,850

Loan

DIA

EUR

10,017

121,014

-

-

131,031

Loan

DIA Brasil

EUR

46,637

-

-

-

46,637

Loan

Grupo El Arbol

EUR

1,805

500

2,000

-

4,305

Loan

DIA Argentina

EUR

3,360

2,270

567

-

6,197

Other Loans

EUR

61,819

123,784

2,567

-

188,170

Mortgage loans have been secured by certain properties owned by the Group and accrue interest at rates between 1.84% and 2.00% at 31 December 2017.

During 2017 the following operations have been carried out:

On 15 December 2017, the Parent repaid in advance a Euros 30,000 thousand loan with maturity in December 2018.

On 15 December 2017, the Parent entered into a Euros 30,000 thousand loan with maturity in December 2020.

On 30 November 2017, the company Twins Alimentación repaid in advance a mortgage loan of Euros 1,285 thousand signed in March 2017 with maturity on 23 March 2019.

On 7 April 2017, the company Beauty by DIA repaid in advance a mortgage loan of Euros 543 thousand signed in November 2010 with maturity on 23 November 2017.

In 2016 the Parent repaid in advance a Euros 60,000 thousand loan signed in December 2015 and another Euros 50,000 thousand loan arranged in 2016. A new loan amounting to Euros 101,000 thousand was arranged in December 2016.

Credit facilities

The Group has arranged credit facilities with various financial institutions, subject to the following limits (in thousands of Euros) at each year end:

Year

Limit granted

Amount available (note 20.2)

Amount used

31/12/2017

237,875

165,173

72,702

31/12/2016

178,357

137,002

41,355

Moreover, at 31 December 2017 and 2016 the Parent has other uncommitted credit facilities, with a limit of Euros 210,000 thousand in both years. The credit facilities that the Group held in 2017 and 2016 accrued interest at market rates.

c) Other financial liabilities

Other financial liabilities include the prevailing “Equity Swap” contracts signed by the Parent. The main characteristics of the contracts held at 31 December 2017 and 2016 are as follows:

At 31 December 2017

Start date

Expiration date

Number of shares

Nominal amount in thousand of euros

Counterpart

Strike

Interest rate

Liquidation

2271272017

2171272018

6,000,000

34,238

Santander

Fixed

Variable

Physical

At 31 December 2016

Start date

Expiration date

Number of shares

Nominal amount in thousand of euros

Counterpart

Strike

Interest rate

Liquidation

22/12/2016

22/03/2017

1,000,000

5,706

Santander

Fixed

Variable

Physical

22/12/2016

22/12/2017

6,000,000

34,238

Santander

Fixed

Variable

Physical

Since the contract settlement is by means of physical liquidation, the Parent undertakes to repurchase the shares at the maturity date of each “Equity Swap”, with no transferability restrictions.

The valuation method for each contract is determined on the basis of the evolution of the share price with respect to the price set in the contract and the coupon accrued.

d) Maturity of borrowings

The maturities of borrowings are as follows:

Thousands of Euros

2016

2017

Less than one year

180,734

269,519

One to two years

232,976

25,360

Three to five years

816,003

633,515

Over five years

13,294

303,070

Total

1,243,007

1,231,464

15.2. Other non-current financial liabilities

Details of other non-current financial liabilities are as follows:

Thousands of Euros

2016

2017

Capital grants

785

491

Other non-current financial liabilities

2,000

2,000

Total grants and other non-current financial liabilities

2,785

2,491

At 31 December 2017 and 2016 “Other non-current financial liabilities” of Euros 2,000 thousand reflect the amounts withheld from the seller in the acquisition of establishments from the Eroski Group, which will be released after five years, in accordance with the addendum to the framework contract signed on 7 August 2015 (see note 8.2).

15.3. Trade and other payables

Details are as follows:

Thousands of Euros

2016

2017

Suppliers

1,660,806

1,510,152

Suppliers, other related parties

-

64,308

Advances received from receivables

2,454

2,920

Trade payables

196,005

133,448

Total Trade and other payables

1,859,265

1,710,828

“Suppliers” and “Trade payables” essentially include current payables to suppliers of goods and services, including those represented by accepted giro bills and promissory notes.

Suppliers, other related parties mainly include current payables for supplies of goods by its associate CDSI.

“Trade and other payables” do not bear interest.

The Group has payables discounting operations with limits of Euros 616,898 thousand and Euros 678,061 thousand at 31 December 2017 and 2016, respectively. Drawdowns total Euros 367,294 thousand at 31 December 2017 and Euros 333,258 thousand at 31 December 2016.

The information required from Spanish DIA Group companies under the reporting requirement established in Spanish Law 15/2010 of 5 July 2010, which amended Spanish Law 3/2004 of 29 December 2004 and introduced measures to combat late payments in commercial transactions, is as follows:

2016

2017

Days

Days

Average payment period to suppliers

45

46

Paid operations ratio

46

46

Pending payment transactions ratio

40

42

Amount (euros)

Amount (euros)

Total payments made

4,881,824,952

4,134,004,583

* Total payment pending

509,127,690

542,911,981

* Receptions unbilled and invoices included in the confirming lines at the year end previously mencioned, are not included in this amount.

15.4. Other financial liabilities

Details of other financial liabilities are as follows:

Thousands of Euros

2016

2017

Personnel

69,262

59,198

Suppliers of fixed assets

60,300

85,992

Other current liabilities

5,080

3,675

Total other liabilities

134,642

148,865

15.5. Fair value estimates

The fair value of financial assets and liabilities is determined by the amount for which the instrument could be exchanged between willing parties in a normal transaction and not in a forced transaction or liquidation.

The Group generally applies the following systematic hierarchy to determine the fair value of financial assets and financial liabilities:

Level 1: Firstly, the Group applies the quoted prices of the most advantageous active market to which it has immediate access, adjusted where appropriate to reflect any differences in credit risk between instruments traded in that market and the one being valued. The current bid price is used for assets held or liabilities to be issued and the asking price for assets to be acquired or liabilities held. If the Group has assets and liabilities with offsetting market risks, it uses mid-market prices for the offsetting risk positions and applies the bid or asking price to the net position, as appropriate.

Level 2: When current bid and asking prices are unavailable, the price of the most recent transaction is used, adjusted to reflect changes in economic circumstances.

As regards the provisions for taxes deriving from the risk of tax inspections, in 2017 the Parent has made provisions of Euros 3,751 thousand.

In 2017 and 2016, charges and applications of provisions for lawsuits filed by employees (related to social security contributions) include labour contingencies mainly in Brazil and Argentina.

With regard to legal provisions, in 2017 provisions of Euros 2,033 thousand were made in Brazil and Euros 1,402 thousand in Spain to cover litigations with third parties.

The reversals of these provisions in both years were due to contract risks that did not materialise.

17. Tax assets and liabilities and income tax

Income tax

Details of the income tax expense/income are as follows:

Thousands of Euros

2016

2017

Current income taxes

Current period

69,179

45,188

Prior periods' current income taxes

(1,802)

(1,221)

Total current income taxes

67,377

43,967

Deferred taxes

Source of taxable temporary differencess

12,200

7,230

Source of deductible temporary differences

(29,456)

(4,928)

Reversal of taxable temporary differences

(6,438)

(6,464)

Reversal of deductible temporary differences

25,436

15,545

Total deferred taxes

1,742

11,383

Total income tax

69,119

55,350

Due to the different treatment of certain transactions permitted by tax legislation, the accounting profit of each Group company differs from taxable income.

A reconciliation of accounting profit for the year with the total taxable income of the Group (calculated as the sum of the taxable income stated in the tax return of each Group company) is as follows:

Thousands of Euros

2016

2017

Profit for the period before taxes from continuing operations

258,994

186,323

Share in profit/(loss) for the year of equity accounted investees

(93)

(288)

Profit for the period before tax

258,901

186,035

Tax calculated at the tax rate of each country

61,986

49,983

Unrecognised tax credits

(252)

(19)

Non-taxable income

(1,894)

(2,343)

Non-deductible expenses

7,757

6,878

Deductions and credits for the current period

(1,009)

(1,306)

Adjustments for prior periods

(1,802)

(1,221)

Capitalised tax loss carryforwards and other adjustments of deferred taxes

1,827

(139)

Unrecognised deferred taxes

1,884

(3,148)

Other adjustments

406

3,669

Tax rate's change adjustment

216

2,996

Total income tax

69,119

55,350

The tax rates of each of the different countries or jurisdictions in which the Group operates have been taken into account to perform this reconciliation. Details of these rates are as follows:

In 2018, the tax rate applicable in Argentina is to decrease from the rate of 35% applicable in 2017 to 30%. This reduction has caused a decrease of Euros 2,989 thousand in deferred tax assets at the closing date of these annual accounts.

Tax assets and tax liabilities

Details of the tax assets and liabilities for 2017 and 2016 recognised in the consolidated statement of financial position at 31 December are as follows:

Thousands of Euros

2016

2017

Deferred tax assets

270,164

253,983

Taxation authorities, VAT

39,816

40,330

Taxation authorities

31,271

24,387

Current income tax assets

8,832

369

Total tax assets

350,083

319,069

Deferred tax liabilities

-

2,206

Taxation authorities, VAT

46.448

51.924

Taxation authorities

39,046

33,768

Current income tax liabilities

15,505

10,913

Total tax liabilities

100,999

98,811

During 2017 the Parent received a refund of Euros 8,158 thousand from the taxation authorities. At the reporting date of last year's annual accounts this amount was recognised as a current tax asset.

A reconciliation of details of deferred tax assets and liabilities (before consolidation adjustments) with the deferred taxes recognised in the consolidated statement of financial position (after consolidation adjustments) is as follows:

2016

2017

Capitalised tax loss carryforwards

226,172

219,905

+ Deferred tax assets

91,535

79,669

Total deferred tax assets

317,707

299,574

Assets offset

(47,543)

(45,591)

Deferred tax assets

270,164

253,983

Deferred tax liabilities

47,543

47,797

Liabilities offset

(47,543)

(45,591)

Deferred tax liabilities

-

2,206

Details of and movements in the Group's tax assets and liabilities (before consolidation adjustments) are as follows:

Deferred tax assets

Thousands of Euros

1 Jan 2016

Adjustments to tax rate

Profit/(loss)

Net equity

Transfers to assets held for sale

Others

Exchange gains/losses

31 Dec 2016

Additions

Disposals

Disposals

Provision

26,063

(4)

10,217

(1,034)

-

-

-

2,248

37,490

Onerous contracts

516

(2)

224

(440)

-

-

-

-

298

Portfolio provisions

3,907

-

-

(3,907)

-

-

-

-

-

Share-based payments

2,242

(1)

2,049

-

-

-

-

-

4,290

Other remuneration

675

-

71

(79)

-

-

-

-

667

Loss carryforwards

240,060

(216)

120

(13,792)

-

-

-

-

226,172

Deductions activation

-

-

2,315

-

-

-

540

-

2,855

Difference between depretation tax-accounting

25,897

-

11,074

(102)

-

-

(7)

1,384

38,246

Other

10,953

(5)

3,614

(6,082)

-

-

-

(791)

7,689

Total non-curent deferred tax asset

310,313

(228)

29,684

(25,436)

-

-

533

2,841

317,707

Thousands of Euros

1 Jan 2017

Adjustments to tax rate

Profit/(loss)

Net equity

Transfers to assets held for sale

Others

Exchange gains/losses

31 Dec 2017

Additions

Disposals

Disposals

Provisions

37,490

(1,687)

3,042

(5,617)

-

(1)

-

(5,043)

28,184

Onerous contracts

298

(1)

152

(75)

-

-

-

-

374

Share-based payments

4,290

(9)

-

(2,084)

-

(36)

-

-

2,161

Other remuneration

667

-

96

-

-

-

-

-

763

Loss carryforwards

226,172

34

78

(6,301)

-

(78)

-

-

219,905

Deductions activation

2,855

-

176

-

-

-

(176)

-

2,855

Difference between depretation tax-accounting

38,246

-

3,489

(638)

-

-

7

(1,237)

39,867

Other

7,689

(1,368)

926

(830)

-

(2)

(5)

(945)

5,465

Total non-curent deferred tax asset

317,707

(3,031)

7,959

(15,545)

-

(117)

(174)

(7,225)

299,574

In addition, the Parent has unrecognised temporary differences deriving from the impairment of the investments in the Chinese companies for an amount of Euros 103,402 thousand, and in the El Árbol Distribución y Supermercados Group for an amount of Euros 3,255 thousand.

Deferred tax liabilities

Thousands of Euros

1 Jan 2016

Adjustments to tax rate

Profit/(loss)

Transfers to assets held for sale

Others

Exchange gains/losses

31 Dec 2016

Additions

Disposals

Disposals

Goodwill

1,385

-

54

(5)

-

-

-

-

1,434

Amortisation and depreciation

22,504

(6)

6,937

(3,052)

-

-

(7)

(80)

26,296

Portfolio provisions

16,533

-

-

(3,307)

-

-

-

-

13,226

Store Sales

-

-

4,413

-

-

-

-

-

4,413

Other

1,604

(6)

808

(74)

(153)

-

-

(5)

2,174

Total non-current deferred tax liabilities

42,026

(12)

12,212

(6,438)

(153)

-

(7)

(85)

47,543

Thousands of Euros

1 Jan 2017

Adjustments to tax rate

Profit/(loss)

Transfers to assets held for sale

Others

Exchange gains/losses

31 Dec 2017

Additions

Disposals

Disposals

Goodwill

1,434

-

55

-

-

-

-

-

1,489

Amortisation and depreciation

26,296

(11)

6,797

(2,367)

-

-

-

(339)

30,376

Portfolio provisions

13,226

-

-

(3,306)

-

-

-

-

9,920

Strore sales

4,413

-

191

-

-

-

-

-

4,604

Other

2,174

(24)

222

(791)

(140)

-

-

(33)

1,408

Total ID de Pasivo No Corriente

47,543

(35)

7,265

(6,464)

(140)

-

-

(372)

47,797

Based on the tax returns, the Group companies have the following accumulated tax losses, deductions and exemptions to be offset in future years amounting to Euros 983,165 thousand in 2017 and Euros 997,847 thousand in 2016.

Limitation period (years)

Thousands of Euros

Years in which generated

Not subjetc to limitation

2018

2019

2020

2021

2022

> 2022

Total

Loss carryforwards activated

Loss carryforwards non-activated

Distribuidora Internacional de Alimentación, S.A.

2014

351,423

-

-

-

-

-

-

351,423

351,423

-

Finandia E.F.C., S.A.U.

2017

259

-

-

-

-

-

-

259

259

-

Twins Alimentación, S.A.

2006-2007

91,248

-

-

-

-

-

-

91,248

91,248

-

Pe-Tra Servicios a la distribución, S.L.

1997-1999

18,549

-

-

-

-

-

-

18,549

-

18,549

Beauty by DIA, S.A. (en 2015 Schlecker, S.A.)

2012

945

-

-

-

-

-

-

945

945

-

Grupo El Árbol, Distribución y Supermercados, S.A.

2000-2014

429,454

-

-

-

-

-

-

429,454

429,454

-

Compañía Gallega de Supermercados, S.A.

2002-2014

3,497

-

-

-

-

-

-

3,497

3,497

-

DIA ESHOPPING, S.L.U.

2015

393

-

-

-

-

-

-

393

393

-

Dia Tian Tian Manag. Consulting Service & Co.Ltd.

2016-2017

-

-

-

-

1,395

672

-

2,067

-

2,067

Shanghai DIA Retail Co.Ltd.

2013-2017

-

15,396

13,545

14,467

13,659

25,024

-

82,091

-

82,091

Dia Portugal Supermercados S.U., Lda

2013-2014

-

225

-

-

-

-

2,941

3,166

3,166

-

DIA Portugal II, S.A.

2017

-

-

-

-

-

73

-

73

-

73

Total tax loss carryforwards

895,768

15,621

13,545

14,467

15,054

25,769

2,941

983,165

880,385

102,780

Spanish Corporate Income Tax Law 27/2014 establishes that for the purposes of determining the gross tax base of the tax group and in relation to write-offs, the accounting standards shall apply, whereby intra-group income and expenses are eliminated before calculating the individual tax base, based on which the amount of pre-consolidation tax loss carryforwards which can be offset against each of the companies during the year is obtained. For these purposes, the Parent carried out a binding consultation to the Tax Authorities to confirm the criteria for calculating the tax loss carryforwards of the Group, and management confirmed this criteria.

In accordance with Royal Decree-Law 3/2016 of 2 December 2016, from 2016 onwards, the Spanish consolidated tax group may offset tax loss carryforwards up to a maximum of 25% of taxable income prior to offset, which extends the period of recovery of the deferred tax asset; the company has carried out extensive tests to ascertain the probable recovery of such tax credits.

Considering the stability of the positive results obtained by the Group, the Management considers that there is evidence that allows to recover the assets for deferred taxes in a period of more than ten years.

At 31 December 2017, Spain's taxation authorities continue their ongoing inspection of the following taxes for the following periods:

Tax

Periods

Income tax

2011-2012

Personal income tax

2012

The inspection is ongoing at the reporting date, although no probable contingencies for the Parent have been identified at the date on which these consolidated annual accounts were authorised for issue. The directors do not expect that any major additional liabilities in relation to the consolidated annual accounts taken as a whole will arise as a result of these inspections, the years open to inspection or the appeals submitted.

During 2017, the verification and inspection procedures for the Company’s 2012 Value Added Tax were completed.

18. Share-based payment transactions

On 25 April 2014 the shareholders at their general meeting approved a long-term incentive plan for 2014-2016, to be settled with a maximum of 6,981,906 Parent shares.

On 22 April 2016 the shareholders at their general meeting approved a long-term incentive plan for 2016-2018, to be settled with a maximum of 9,560,732 Parent shares.

Both plans are for the current and future executive directors, senior management and other key personnel of DIA and its subsidiaries, determined by the Board of Directors, who meet the requirements established in the general conditions and choose to voluntarily adopt the Plan. The purpose of these plans is to award and pay variable remuneration in DIA shares, according to compliance with business objectives for the Parent and the Group. The key features of these incentive plans are as follows:

Incentive Plans

Terms and Compliance objectives

Timetable for delivey of shares

Maxium number of shares at 31st December

Price

2014-2016

Detailed in the section A.4 of IAR 2014 pages 5 and 6

April 2017

2,016,778

5.3950

January 2018

2016-2018

Detailed in the section A.4 of IAR 2016 pages 6 and 7

April 2019

1,715,878

5.9203

January 2020

In 2017 the profit/(loss) recognised in respect of these plans amount to Euros (4,893) thousand and Euros 15,000 thousand in 2016 and are recognised in personnel expenses in the consolidated income statement. The balancing entry was recognised under other own equity instruments. The payments made in relation to the 2014-2016 Long-Term Incentives Plan during 2017 amounted to Euros 5,347 thousand, entailing the transfer of 721,914 own shares. The payments made in relation to the 2011-2014 Long-Term Incentives Plan and the Multi-Year Variable Remuneration Plan in 2016 amounted to Euros 5,634 thousand, entailing the transfer of 998,772 own shares.

19. Other income and expenses

19.1. Other income

Details of other income are as follows:

Thousands of Euros

2016

2017

Fees and interest to finance companies (note 8.3)

1,700

2,033

Service and quality penalties

34,701

38,380

Revenue from lease agreements (note 7)

26,415

30,455

Other revenue from franchises

14,411

8,622

Revenue from information services to suppliers

14,814

25,359

Revenue from the sale of packaging

8,547

9,306

Gains for the sale of fixed assets (note 19.9)

16,461

31,226

Other income

9,149

10,279

Total other operating income

126,198

155,660

Contractual penalties for service include the income obtained by the Group from the collection of penalties charged to suppliers.

Proceeds from the disposal of fixed assets correspond to sale and leaseback contracts of certain DIA Group warehouses and stores (see notes 5 and 7). In 2017 the Group has classified proceeds from the sale of Group properties to third parties as Other income for the purposes of better understanding, adapting the 2016 figures accordingly for comparative purposes.

19.2. Merchandise and other consumables used

This item includes purchases, less volume discounts and other trade discounts, and changes in inventories, as well as the cost of products sold by the finance company.

Details of borrowings are as follows:

Thousands of Euros

2016

2017

Goods and other consumables used

6,472,424

6,336,585

Inventory variation

(97,085)

42,052

Other sales costs

392,031

429,959

Total

6,767,370

6,808,596

19.3. Personnel expenses

Details of personnel expenses are as follows:

Thousands of Euros

2016

2017

Salaries and wages

636,784

630,290

Social Security

162,539

164,964

Defined contribution plans

(63)

300

Other employee benefits expenses

19,402

17,946

Parcial total personnel expenses

818,662

813,500

Expenses for share-based payment transactions

14,981

(4,557)

Total personnel expenses

833,643

808,943

The decrease in expenses of share-based payment transactions is attributable to the income accrued in connection with the 2016-2018 incentive plan (see note 18).

19.4. Operating expenses

Details of operating expenses are as follows:

Thousands of Euros

2016

2017

Repairs and maintenance

47,795

48,113

Utilities

88,062

82,656

Fees

22,893

23,053

Advertising

55,607

51,548

Taxes

22,056

23,379

Rentals, property (note 7)

297,296

316,611

Rentals, equipment (note 7)

5,563

5,997

Other general expenses

94,241

93,714

Total operating expenses

633,513

645,071

19.5. Amortisation and impairment

Details are as follows:

Thousands of Euros

2016

2017

Amortisation of intangible assets (note 6.2)

9,187

10,515

Depreciation of property, plant and equipment (note 5)

218,143

224,997

Total amortisation and depreciation

227,330

235,512

Impairment of intangible assets and goodwill (note 6)

646

5,255

Impairment of property, plant and equipment (note 5)

12,604

8,032

Total impairment

13,250

13,287

19.6. Losses on disposal of assets

The losses recorded on these transactions in 2017 and 2016 derive from the closures and remodelling operations mentioned in note 5.

At 31 December 2017 and 2016, interest on bank loans includes the finance costs associated with bank loans, primarily in Spain, Brazil and Argentina.

Interest on bonds includes the accrued interest and costs as a result of the bond issues described in note 15.1 (a).

Other finance costs at 31 December 2017 and 2016 primarily reflect the bank debit and credit interest rates in Argentina linked to its revenues.

19.8. Foreign currency transactions

Details of the exchange differences on foreign currency transactions are as follows:

Thousands of Euros

2016

2017

Currency exchange losses (note 19.7)

(3,743)

(2,914)

Currency exchange gains (note 19.7)

4,153

520

Trade exchange losses

(562)

(441)

Trade exchange gains

849

1,513

Total

697

(1,322)

19.9. Non-IFRS performance measures

Thousands of Euros

2016

2017

Operating Profit (EBIT)

309,538

247,073

Expenses relating to acquisitions

14,520

26,022

Expenses for restructuring and efficiency process

25,590

52,339

Expenses related to the transfer of own stores to franchises

28,675

12,713

Gains for the sale of fixed assets (note 19.1)

(16,461)

(31,226)

Parcial total of other cash elements (1)

52,324

59,848

Expenses relating to share based payments transactions

14,643

(4,858)

Losses on disposal of fixed assets (note 19.6)

10,811

17,728

Impairment of fixed assets (note 19.5)

13,250

13,287

Amortizations related to the closing of stores

584

3,517

Total of other excluded items to analyze ordinary performance (2)

91,612

89,522

Operating Profitn ajusted (EBIT ajusted)

401,150

336,595

Thousands of Euros

2016

2017

Operating Profit (EBIT)

309,538

247,073

Amortisation, depreciation and impairment (note 19.5)

240,580

248,799

Losses on disposal of fixed assets (note 19.6)

10,811

17,728

Gross operating profit (EBITDA)

560,929

513,600

Other cash elements (1)

52,324

59,848

Expenses relating to share based payments transactions

14,643

(4,858)

Gross operating profit ajusted (EBITDA ajusted)

627,896

568,590

Thousands of Euros

2016

2017

Net Profit atributted to equityholders of the parent

174,043

109,579

Other excluded items to analyze ordinary performance (2)

91,612

89,522

Items excluded from financial income and expenses

2,085

9,039

Items excluded from income tax

(15,188)

(12,545)

Losses net of taxes of discontinued operations (note 13)

15,874

21,434

Net Profit ajusted atributted to equityholders of the parent

268,426

217,029

Costs of acquisition comprise expenses incurred integrating the businesses acquired and stores bought from third parties. In both years these are expenses associated with the purchase from El Árbol Distribución y Supermercados Group, S.A. and stores bought from the Eroski Group, which include the cost of closing down non-profitable stores, as well as productivity measures permitting the guaranteed continuity of the stores and the cost of remodelling the stores to adapt them to the Plaza and DIA design.

Expenses incurred in restructuring and efficiency processes correspond to costs of improving productivity and efficiency, which include the cost of closing down stores and/or warehouses and the expenses borne by the company during the temporary closure of stores for remodelling into the new formats.

Expenses relating to the transfer of own stores to franchises are costs mainly borne during the transfer of the store to the franchise for management on a franchised basis and chiefly relate to employee termination expenses.

The items excluded from corporation tax mainly correspond to the tax effect of the other items excluded for the purposes of analysing ordinary income and those items excluded from financial income and expenses.

20. Commitments and contingencies

a) Commitments

Commitments pledged and received by the Group but not recognised in the consolidated statement of financial position comprise contractual obligations which have not yet been executed. The two types of commitments relate to cash and expansion operations. The Group also has lease contracts that represent future commitments undertaken and received.

Off-balance-sheet cash commitments comprise:

available credit facilities which were unused at the reporting date;

credit commitments undertaken by the Group's finance company with customers within the scope of its operations, and banking commitments received.

Expansion operation commitments were undertaken for expansion at Group level.

Finally, commitments relating to lease contracts for property and furniture are described in note 8 Operating Leases.

Itemised details of commitments at 31 December 2017 and 2016 are as follows:

20.1. Pledged

Thousands of Euros

In 1 year

In 2 year

3-5 years

+ 5 years

Total

At 31st December 2017

Guarantees

23,409

510

2,185

12,057

38,161

Credit facilities to customers (finance companies)

79,550

-

-

-

79,550

Cash

102,959

510

2,185

12,057

117,711

Purchase options

7,212

24,084

2,219

48,089

81,604

Commitments related to commercial contracts

13,820

2,468

1,846

1,130

19,264

Other commitments

4,530

2,217

7,209

17,117

31,073

Transactions / properties / expansion

25,562

28,769

11,274

66,336

131,941

Total

128,521

29,279

13,459

78,393

249,652

At 31st December 2016

Guarantees

30,500

250

1,183

10,506

42,439

Credit facilities to customers (finance companies)

79,129

-

-

-

79,129

Cash

109,629

250

1,183

10,506

121,568

Purchase options

9,630

14,643

5,999

37,716

67,988

Commitments related to commercial contracts

16,743

4,016

1,469

117

22,345

Other commitments

4,717

3,353

3,672

16,578

28,320

Transactions / properties / expansion

31,090

22,012

11,140

54,411

118,653

Total

140,719

22,262

12,323

64,917

240,221

The Parent is the guarantor of the drawdowns on the credit facilities made by its Spanish subsidiaries, which at 31 December 2017 amounted to Euros 2,777 thousand (Euros 1,687 thousand in 2016).

20.2. Received

Thousands of Euros

In 1 year

In 2 years

3-5 years

+ 5 years

Total

At 31st December 2017

Available credit facilities (note 15.1 b))

165,173

-

-

-

165,173

Available sindicated revolving credit facilities

600,000

-

-

-

600,000

Available confirming lines

249,604

-

-

-

249,604

Cash

1,014,777

-

-

-

1,014,777

Guarantees received for commercial contracts (note 22 d))

24,394

5,415

20,950

55,610

106,369

Other commitments

4,000

-

-

-

4,000

Transactions / properties / expansion

28,394

5,415

20,950

55,610

110,369

Total

1,043,171

5,415

20,950

55,610

1,125,146

At 31st December 2016

Available credit facilities (note 15.1 b))

137,002

-

-

-

137,002

Available revolving credit facilities

601,000

-

-

-

601,000

Available confirming lines

344,803

-

-

-

344,803

Cash

1,082,805

-

-

-

1,082,805

Guarantees received for commercial contracts (note 22 d))

28,300

5,950

25,961

38,726

98,937

Other commitments

-

-

49

199

248

Transactions / properties / expansion

28,300

5,950

26,010

38,925

99,185

Total

1,111,105

5,950

26,010

38,925

1,181,990

b) Contingencies

The Group is undergoing legal proceedings and tax inspections in a number of jurisdictions, some of which have been completed by the taxation authorities and additional tax assessments have been appealed by the Group companies at 31 December 2017 (see note 17). The Group recognises a provision if it is probable that an obligation will exist at year end which will give rise to an outflow of resources embodying economic benefits and the outflow can be reliably measured. As a result, management uses significant judgement when determining whether it is probable that the process will result in an outflow of resources and when estimating the amount.

In 2014 DIA Brazil was inspected by the local taxation authorities, as a result of which it has received two additional tax assessments, one amounting to Euros 17,238 thousand (Brazilian Reals 68,483 thousand) in relation to a discrepancy concerning tax on income from discounts received from suppliers, and another amounting to the updated figure of Euros 82,782 thousand (Brazilian Reals 328,885 thousand) in relation to the recognition of movements of goods and the consequent impact on inventories.

In 2016, the initial administrative ruling on the discrepancy concerning income from suppliers was unfavourable. A legal defence is being mounted and the legal counsel believe there are sufficient grounds to win a ruling favourable to DIA Brazil. As regards the latter proceedings, an unfavourable decision was handed down via administrative channels, despite the stock movements having been shown to be in line with the criteria followed in all the countries in which the DIA Group operates. A ruling has yet to be handed down on the appeal filed against this ruling. Nevertheless, based on the reports from the external legal counsel, the probability of losing this lawsuit continues to be considered remote at 31 December 2017.

21. Related parties

Transactions other than ordinary business or under terms differing from market conditions carried out by the directors of the Parent

In 2017 and 2016 the directors of the Parent have not carried out any transactions other than ordinary business or applying terms that differ from market conditions with the Parent or any other Group company.

Related party balances and transactions

During 2017 and 2016 the Group has carried out the following related party transactions: ICDC, Red Libra and CD Supply Innovation, mainly corresponding to trade operations and the balance receivable of which at 31 December 2017 and 2016 is show in note 8.1 and note 15.3. The transactions carried out with related parties during both years are as follows:

2016

2017

ICDC

18,433

23,522

Red Libra

-

(1,157)

CDSI

-

(56,466)

Total transactions

18,433

(34,101)

Transactions with directors and senior management personnel

Details of remuneration received by the directors and senior management of the Group in 2017 and 2016 are as follows:

Thousands of Euros

2016

2017

Directors

Senior management personnel

Directors

Senior management personnel

2,756

4,175

2,237

4,257

In 2017 and 2016 the directors of the Parent earned Euros 1,174 thousand and Euros 1,188 thousand, respectively, (included in the table above) in their capacity as board members.

In 2017 shares from the 2014-2016 Long-Term Incentives Plan were handed over to members of Senior Management, recognised in remuneration accrued for the year.

In 2016 the shares of the four-year incentive plan for 2011-2014 were awarded and the value of the shares awarded to one executive who is both a board member and a member of senior management was recognised as remuneration earned in this year.

Article 39.5 of the Parent's articles of association requires the disclosure of the remuneration earned by each of the present members of the board of directors in 2017 and 2016. Details are as follows:

2017

Thousands of Euros

Board members

Financial instruments

Fixed remuneration

Variable remuneration

Others

Ms. Ana María Llopis Rivas

43.9

120.2

-

-

Mr. Ricardo Currás de Don Pablos (*)

21.3

667.5

456.4

7.4

Mr. Julián Díaz González

32.7

81.8

-

-

Mr. Juan María Nin Genova

28.0

86.6

-

-

Mr. Richard Golding

28.9

88.8

-

-

Mr. Mariano Martín Mampaso

34.7

89.7

-

-

Mr. Antonio Urcelay Alonso

28.0

90.6

-

-

Ms. Angela Lesley Spindler

34.8

83.7

-

-

Mr. Borja de la Cierva Álvarez de Sotomayor

28.0

89.6

-

-

Ms. María Luisa Garaña Corces

21.3

73.5

-

-

Total

302

1,472

456

7

(*) Remuneration as director plus remuneration as Board member.

2016

Thousands of Euros

Board members

Financial instruments

Fixed remuneration

Variable remuneration

Others

Ms. Ana María Llopis Rivas

51.4

124.2

-

-

Mr. Ricardo Currás de Don Pablos (*)

522.7

669.4

462.8

7.2

Mr. Julián Díaz González

38.3

81.6

-

-

Mr. Juan Maria Nin Genova

32.7

92.1

-

-

Mr. Richard Golding

35.9

98.8

-

-

Mr. Mariano Martín Mampaso

41.9

94.7

-

-

Mr. Pierre Cuilleret

11.8

26.9

-

-

Ms. Rosalía Portela de Pablo

22.4

64.1

-

-

Mr. Antonio Urcelay Alonso

32.7

94.1

-

-

Ms. Angela Lesley Spindler

34.0

72.7

-

-

Mr. Borja de la Cierva Álvarez de Sotomayor

10.5

28.6

-

-

Ms. María Luisa Garaña Corces

1.2

2.6

-

-

Total

836

1,450

463

7

(*) Remuneration as director plus remuneration as Board member.

During 2017 and 2016 the members of the board of directors and senior management personnel of the Group have not carried out transactions other than ordinary business or applying terms that differ from market conditions with the Parent or Group companies.

The civil liability insurance premiums paid by the Group in respect of directors and senior management personnel totalled Euros 29 thousand in both years.

The directors of the Group and their related parties have had no conflicts of interest requiring disclosure in accordance with article 229 of the TRLSC.

22. Financial risk management: objectives and policies

The Group's activities are exposed to market risk, credit risk and liquidity risk.

The Group's senior executives manage these risks and ensure that its financial risk activities are in line with the appropriate corporate procedures and policies and that the risks are identified, measured and managed in accordance with DIA Group policies.

A summary of the management policies established by the board of directors of the Parent for each risk type is as follows:

Risks are managed by the Group's Finance Department. This department identifies, evaluates and mitigates financial risks in close collaboration with the Group's operational units.

b) Currency risk

The Group operates internationally and is therefore exposed to currency risk when operating with foreign currencies, especially with regard to the US Dollar. Currency risk is associated with future commercial transactions, recognised assets and liabilities, and net investments in foreign operations.

In order to control currency risk associated with future commercial transactions and recognised assets and liabilities, Group entities use forward currency contracts negotiated with the Treasury Department. Currency risk arises on future commercial transactions in which the recognised assets and liabilities are presented in a foreign currency other than the Company's functional currency.

In 2017 and 2016 the Group has performed no significant transactions in currencies other than the functional currency of each company. However, the Group has contracted exchange rate insurance policies for non-recurrent transactions in US Dollars.

The hedging transactions carried out in US Dollars during 2017 amounted to US Dollars 7,529 thousand (US Dollars 6,552 thousand in 2016). This amount represented 68.76% of the transactions carried out in this currency in 2017 (66.09% in 2016). At 2017 year end, outstanding hedges in this currency total US Dollars 1,809 thousand (US Dollars 1,803 thousand in 2016) and expire in the next 11 months. These transactions are not significant with respect to the Group's total volume of purchases.

The Group holds several investments in foreign operations, the net assets of which are exposed to currency risk. Currency risk affecting net assets of the Group's foreign operations in Argentine Pesos, Chinese Yuan and Brazilian Reals is mitigated primarily through borrowings in the corresponding foreign currencies.

In 2017, had the Euro strengthened/weakened by 10% against the US Dollar, with the other variables remaining constant, consolidated post-tax profit would have been Euros 555 thousand higher/lower (Euros 328 thousand in 2016), mainly as a result of translating trade receivables and debt instruments classified as available-for-sale financial assets.

The translation differences included in other comprehensive income are significant due to the major depreciation of the Argentine Peso and the Brazilian Real in 2017. Had the exchange rates in the countries where the Group operates that use a currency other than the Euro depreciated/appreciated by 10% the translation differences would have varied by +22.34% / -22.34%, respectively, in the equity of the DIA Group.

The Group's exposure to currency risk at 31 December 2017 and 2016 in respect of the balances outstanding in currencies other than the functional currency of each country is immaterial:

c) Price risk

The Group is not significantly exposed to risk derived from the price of equity instruments or listed raw material prices.

d) Credit risk

The Group does not have significant concentrations of credit risk. The Group has policies to ensure that wholesale sales are only made to customers with adequate credit records. Retail customers pay in cash or by credit card. Derivative and cash transactions are only performed with financial institutions that have high credit ratings. The Group has policies to limit the amount of risk with any one financial institution.

The credit risk presented by the Group is attributable to the transactions it carries out with the majority of its franchisees and is mitigated through the bank and other guarantees received, which are described in note 20. Details are as follows:

Thousands of Euros

2016

2017

Trade operations non-current (note 8.1 a))

69,345

73,084

Trade operations current (notes 8.1 a))

132,303

157,149

Franchise deposits (note 8.2)

2,958

3,256

Guarantees received (note 20.2)

(98,937)

(106,369)

Total

105,669

127,120

Non-current commercial transactions reflect the financing of the starting inventory of the franchisees, which is repaid monthly based on the cash generation profile of the business. Current commercial transactions comprise financing of goods supplies and amounts falling due less than 12 months from the initial financing.

In 2017 the Group entered into agreements to transfer supplier trade payables with and without recourse (see notes 3 (l) and 8.1 (b)). The accrued cost of the transfer of these receivables amounted to Euros 240 thousand in 2017 (Euros 139 thousand in 2016) (see note 19.7). Undue balances at 31 December 2017 amount to Euros 99,624 thousand (Euros 88,449 thousand at 31 December 2016), all of which are without recourse.

The Group's exposure to credit risk at 31 December 2017 and 2016 is shown below. The accompanying tables reflect the analysis of financial assets by remaining contractual maturity dates:

Thousands of Euros

Maturity

2017

Guarantees

per contract

57,998

Other guarantees

2020

2,000

Equity instruments

-

88

Other loans

2019-2021

524

Trade receivables

2019-2035

73,084

Other non-current financial assets

2019-2024

14,403

Non-current assets

148,097

Franchise deposit (note 8.2)

2018

3,256

Other deposits

2018

8,541

Credits to personnel

2018

3,027

Other loans

2018

1,016

Loans on the sale of fixed assets

2018

498

Other finantial assets

2018

2,092

Trade receivables

2018

219,168

Receivables from group companies

2018

2,678

Consumer loans from finance companies

2018

1,070

Current assets

241,346

Thousands of Euros

Maturity

2016

Guarantees

per contract

46,269

Other guarantees

2020

2,000

Equity instruments

-

88

Other loans

2018-2021

572

Trade receivables

2018-2035

69,345

Other non-current financial assets

2018-2020

9,728

Consumer loans from finance companies

2018

401

Non-current assets

128,403

Franchise deposit (note 8.2)

2017

2,958

Other deposits

2017

7,366

Credits to personnel

2017

2,920

Other loans

2017

1,219

Other finantial assets

2017

5,271

Trade receivables

2017

162,427

Receivables from group companies

2017

4,852

Consumer loans from finance companies

2017

6,220

Current assets

193,233

The Group has taken out credit insurance policies to ensure the collectability of certain trade receivables for sales. The trade receivables covered by these policies totalled Euros 4,855 thousand at 31 December 2017 (Euros 6,037 thousand at 31 December 2016).

The returns on these financial assets totalled Euros 4,818 thousand in 2017 and Euros 5,015 thousand in 2016.

Details of non-current and current trade and other receivables by maturity in 2017 and 2016 are as follows:

Thousands of Euros

Current

Total

Unmatured

Between 0 and 1 month

Between 2 and 3 months

Between 4 and 6 months

Between 7 and 12 months

31st December 2017

221,846

151,983

20,826

44,223

3,547

1,267

31st December 2016

167,279

105,518

29,585

29,504

1,320

1,352

Thousands of Euros

Non-current

Total

Between 1 and 2 years

Between 3 and 5 years

Over five years

31st December 2017

73,084

23,198

32,029

17,857

31st December 2016

69,345

21,895

33,866

13,584

The Group’s accounting policies establish that as a rule amounts receivable with a maturity of over six months are impaired. However, the Group assesses, based on historical data, all accounts receivable, recording impairments when a loss is incurred.

e) Liquidity risk

The Group applies a prudent policy to cover its liquidity risks, based on having sufficient cash and marketable securities as well as sufficient financing through credit facilities to settle market positions. Given the dynamic nature of its underlying business, the Group's Finance Department aims to be flexible with regard to financing through drawdowns on contracted credit facilities.

The Group's exposure to liquidity risk at 31 December 2017 and 2016 is shown below. These tables reflect the analysis of financial liabilities by remaining contractual maturity dates:

Thousands of Euros

Maturity

2017

Debentures and bonds long term

2019-2023

892,570

Mortgage loan

2019-2020

814

Other bank loans

2019-2020

30,842

Finance lease payables

2019-2027

26,229

Guarantees and deposits received

per contract

11,148

Other non-current financial debt

2019-2021

342

Other non-current financial liabilities

2019

2,491

Total non-current financial liabilities

964,436

Debentures and bonds long term

2018

6,021

Mortgage loan

2018

633

Other bank loans

2018

144,268

Other financial liabilities (note 15.1 c))

2018

34,238

Finance lease payables

2018

10,547

Credit facilities drawn down

2018

65,809

Expired interest

2018

132

Guarantees and deposits received

2018

2,813

Derivatives

2018

4,339

Other financial debts

2018

719

Trade and other payables

2018

1,710,828

Suppliers of fixed assets

2018

85,992

Personnel

2018

59,198

Other current liabilities

2018

3,675

Total current financial liabilities

2,129,212

Thousands of Euros

Maturity

2016

Debentures and bonds long term

2019-2021

794,652

Syndicated credits (Revolving credit facilities)

2018

97,360

Mortgage loan

2018-2020

2,632

Other bank loans

2018-2019

126,351

Finance lease payables

2027

31,305

Guarantees and deposits received

per contract

9,469

Other non-current financial debt

2022

504

Other non-current financial liabilities

2020

2,785

Total non-current financial liabilities

1,065,058

Debentures and bonds long term

2017

5,587

Mortgage loan

2017

2,218

Other bank loans

2017

61,819

Other financial liabilities (note 15.1 c))

2017

39,944

Finance lease payables

2017

11,634

Credit facilities drawn down

2017

41,355

Expired interest

2017

520

Guarantees and deposits received

2017

5,817

Derivatives

2017

6,600

Other financial debts

2017

5,240

Trade and other payables

2017

1,859,265

Suppliers of fixed assets

2017

60,300

Personnel

2017

69,262

Other current liabilities

2017

5,080

Total current financial liabilities

2,174,641

Details of non-current financial debt by maturity in 2017 and 2016 are as follows:

f) Cash flow and fair value interest rate risks

The Group contracts different interest rate hedges to mitigate its exposure, in accordance with its risk management policy. At 31 December 2017 and 2016 there were no outstanding derivatives contracted with external counterparties to hedge interest rate risk related to long-term financing.

During 2017 fixed-rate debt as a percentage of the volume of average gross debt totalled 84.25%, compared with 59.33% in the previous year.

Group policy is to keep financial assets liquid and available for use. These balances are held in financial institutions with high credit ratings.

A 0.5 percentage point rise in interest rates would have led to a variation in profit after tax of Euros 111 thousand in 2017 (Euros 1,911 thousand in 2016).

23. Other information

23.1. Employee information

The average headcount of full-time equivalent personnel, distributed by professional category, is as follows:

2016

2017

Management

209

204

Middle management

1,719

1,759

Other employees

40,739

39,591

Total

42,667

41,554

The average headcount in 2017 includes 815 employees in China (1,080 in 2016). Personnel expenses for these employees are recorded under discontinued operations in the income statement.

At year end the distribution by gender of Group personnel and the members of the board of directors is as follows:

2016

2017

Female

Male

Female

Male

Board members

3

7

3

7

Senior management

1

8

1

7

Other management

60

141

55

135

Middle management

688

1,079

679

1,074

Other employees

28,020

14,488

27,143

14,242

Total

28,772

15,723

27,881

15,465

At year end, the headcount includes 733 employees in China in 2017 (321 men and 412 women) and 1,027 employees in China in 2016 (403 men and 624 women).

During 2017 the Group employed an average of one executive (one in 2016), six middle management personnel (six in 2016) and 550 other employees (518 in 2016) with a disability rating of 33% or above (or an equivalent local classification).

23.2. Audit fees

KPMG Auditores, S.L., the auditor of the annual accounts of the Group, and other affiliates of KPMG International have invoiced the following fees for professional services during the years ended 31 December 2017 and 2016:

The amounts detailed in the above tables include the total fees for services rendered in 2017 and 2016, irrespective of the date of invoice.

23.3. Environmental information

The Group takes steps to prevent and mitigate the environmental impact of its activities.

The expenses incurred during the year to manage this environmental impact are not significant.

The Parent's board of directors considers that there are no significant contingencies in connection with the protection and improvement of the environment and that it is not necessary to recognise any environmental provisions.

24. Events after the reporting period

On February 20, 2018, DIA has signed a strategic alliance with CaixaBank, structured through the purchase by CaixaBank Consumer Finance of the 50% of the shares of Finandia, E.F.C., S.A. The purchase is subject to the authorization processes of the competent authorities (see notes 1 and 13).